Government 
Telephones 



f 



ames Mavor 




Glass 

Book— **f_ 

CopyrightE? 



COPYRIGHT DEPOSIT. 



GOVERNMENT 
TELEPHONES 

THE EXPERIENCE OF 
MANITOBA, CANADA 



BY 



JAMES MAVOR, Ph.D. 

Professor of Political Economy in the University of 

Toronto: Author of "An Economic History 

of Russia," etc., etc. 



NEW YORK 

MOFFAT, YARD & COMPANY 

1916 



A3 



'ft* 



Copyright, 1916. By 

MOFFAT, YARD AND COMPANY 

NEW YORK 



All rights reserved 




DEC -6 1916 



9CIA446707 



CONTENTS 



Introduction 



PAGE 

I 



Preface 



CHAPTER 

I The Acquisition of the Bell System ... 13 

Early telephone development under private enter- 
prise. Political agitation for public ownership of tele- 
phones. Substantial reduction in telephone rates 
promised under public ownership. Construction by the 
Government of a competitive telephone system begun 
in 1907. Government purchase of the extensive system 
of the Bell Company, December 30, 1907. Promises 
of the Government as to reduction of rates, commercial 
management, and profitable operation. 

II The Government System Under the First 

Commission 36 

Telephone management vested in a Commission un- 
der the control of the Government. Telephone policies 
determined by political considerations; Governmental 
interference in the telephone management. A sectional 
increase in rates; telephone management dominated by 
political influence. Substantial profits from the first 
year's operations alleged by the Government. Real 
deficit in 1908 concealed by unsound accounting 
methods. A moderate rate reduction effected by the 
Government for political purposes. Labor difficulties. 
Deficit in 1909 concealed by the accounting methods 
prescribed by the Government. Construction policy of 
the Government ineconomical and marked by political 
abuses. Financial result in 1910 again an apparent 
profit but a real loss. Fictitious profits disappear in 
1911; an aggregate loss of over $300,000. Govern- 
ment policies result in extravagance, inefficiency and 



CONTENTS 

CHAPTER PAGE 

discrimination in violation of promises. Long distance 
rates increased; proposal to revise exchange rates 
violently attacked by the public. Appointment of a 
Royal Commission, under the control of the Govern- 
ment, to investigate the Telephone Commission. Tele- 
phone mismanagement ascribed by the Royai Commis- 
sion to the Telephone Commission instead of to the 
Government. Resignation of the Telephone Commis- 
sion. 



III The Government System Reorganised . .115 

Appointment of a single Telephone Commissioner 
followed by ostensible, but largely ineffectual, admin- 
istrative reforms. Exchange rates increased; private 
telephone competition prevented. Telephone accounts 
still defective; a real loss of over $200,000 in 1912. 
Inadequate provision against depreciation ; real finan- 
cial result in 1913 again a deficit. Quality of service 
unsatisfactory. More administrative reforms, with 
extension of Government control ; accounts show an- 
other deficit in 1914 and improper use of telephone 
funds. The telephone management a campaign issue; 
extension of telephone service less than that in the 
United States; the passing of the Government. System 
used for political purposes by the new Government; 
an aggregate loss of $1,000,000. Increasing deficits 
despite reports of profits; no prospect of relief from 
political abuses. 

IV Conclusions 160 

Index .165 



PREFACE 

Although there are many difficulties inherent in 
Governmental management of industrial enterprises, 
and although in practically every country these diffi- 
culties have emerged in a more or less acute form, 
any new example of such management, especially one 
upon a considerable scale, is worthy of careful exam- 
ination in order to determine to what degree, if at 
all, the inherent difficulties have been overcome 
either by the sagacity of the Government or by the 
coincidence of unusually favorable conditions. The 
test of practical experience is after all a good one; 
and the study of a living organism offers certain ad- 
vantages over the study of an organism whose life 
history is closed. The disadvantage is that the liv- 
ing organism cannot without risk be cut open to see 
what is going on inside and that therefore the view 
of it must be an external one aided by diagnosis of 
its interior condition derived from the external ap- 
pearances. 

Under the influence of such reflections, during the 
summer of the memorable year 19 14, I made an in- 
quiry into the telephone system of Manitoba in or- 
der to ascertain the facts of the case. The Provin- 



vi PREFACE 

cial Government had undertaken the ownership and 
operation of the telephones in the Province in 1908; 
the system was the largest under Government own- 
ership in America; the Provincial Government had 
been by no means modest, either in promises or in 
announcements of performances; political capital 
had been raised upon the credit of the telephones by 
Cabinet Ministers and by candidates at elections; the 
alleged success of the enterprise had been widely 
advertised in the organs of the Government and in 
those of the advocates of "public ownership." On 
the other hand, politicians of the party opposed to 
the Government and the Opposition press, while in 
general approving of the policy of public ownership 
in the abstract, attacked the management of the Gov- 
ernment, sometimes abusing the Government for ex- 
travagance and at other times for parsimony. 

For the reason that a living organism was in- 
volved it was not easy to study the Government tele- 
phone system in Manitoba in actual operation. An 
exhaustive investigation into the contemporary tech- 
nical and financial position of the system would nec- 
essarily have the character of a post-mortem. Such 
an investigation could moreover be competently con- 
ducted only by an impartial tribunal appointed by 
extra-Provincial authority and endowed with full 
powers to call for witnesses and documents, to take 
evidence upon oath, and to employ experts to ex- 
amine the accounts and to appraise the plant. 



PREFACE vii 

My inquiry was necessarily of a much less formid- 
able character. It was unavoidable to confine it al- 
most altogether to the history of the system in so far 
as this history might be gathered from published 
documents, from contemporary newspapers, and 
from conversation with those who had had relations 
with the system or opportunities to know the course 
of events. The inquiry was greatly facilitated by 
the fact that a considerable mass of privately col- 
lected authoritative data relating to the subject for- 
tunately came into my possession. The following 
pages are the result of a critical analysis of all the 
material at my disposal. Much of it was found to 
be inaccurate or biased and was therefore rejected. 
The narrative is scrupulously documented. It pur- 
ports to set forth statements of fact readily suscepti- 
ble of confirmation by any one who will take the 
trouble to consult the authorities which have been 
given. The conclusions which are drawn from the 
statements of fact seem to be irresistible, and they 
are stated with due reserve. The book must there- 
fore be judged not as an attack upon the Manitoba 
Government nor upon its administration of the tele- 
phone system, but as a critical narrative of historical 
facts written from a point of view as impartial as 
possible. 

It should be noticed that since my inquiry was con- 
cluded, the Government which was responsible for 
the purchase of the telephone system and for its ad- 



viii PREFACE 

ministration during the first seven and a half years 
of Government ownership has ceased to exist. Some 
of its members were indicted for infringement of the 
criminal law; but the disagreement of the jury 
avoided a positive verdict. The present Govern- 
ment has been in existence only a short time ; never- 
theless, certain of its acts have been significant and 
ominous, and brief mention of these acts has been 
included in the narrative upon the basis of such 
printed authentic information as has recently come to 
my notice. 

My inquiry included the telephone systems in the 
Provinces of Alberta and Saskatchewan where, as in 
Manitoba, Government ownership of telephones was 
adopted about a decade ago; but the systems in these 
Provinces are really too small to warrant extended 
consideration and I have taken no steps toward pub- 
lishing my notes on them. However, it may be said 
that, on the whole, the history — and results — of 
public ownership both in Alberta and in Saskatche- 
wan have been analogous to those in Manitoba, al- 
though of course on a smaller scale. 

James Mavor. 

Toronto, 

ist September, 191 6. 



INTRODUCTION 

The invention of the telephone has probably pro- 
duced more important social reactions than either 
the railways or the telegraph, although the telephone 
was introduced only forty years since, while the rail- 
way is nearly a century and the telegraph about 
three-quarters of a century old. The rapidity of 
the development of the telephone and the wide ex- 
tension of its use have resulted from the application 
of the inventive genius of a large number of persons 
and from the encouragement of this genius by private 
enterprise, especially in America. 

In Europe the telephones are now very generally 
owned by the Governments of the respective coun- 
tries in correspondence with the view of the charac- 
ter and functions of the State which has developed in 
Central Europe during the past seventy-five years. 
This view involves the more or less complete subor- 
dination of the individual to the State and places 
enormous industrial and financial power in the hands 
of the governing groups. This power has been used 
to the full during recent years to establish and to con- 
tinue the political pre-eminence of these governing 
groups. The interests of the public are lost sight of 



2 INTRODUCTION 

in the pursuit of the assumed interests of the State — 
a body by no means identical with the mass of the 
public, but to be regarded rather as a body of per- 
sons whose interests are frequently opposed to those 
of the community of persons who constitute the 
nation. 

There is no reason to believe that the policy which 
has been adopted by the Central European Empires 
and copied in a less extensive degree by the nations 
of western, southern and northern Europe, will be 
permanent. There have been many oscillations in 
historical times between what may be generally called 
medieval legislative and administrative restriction 
and modern freedom of the exercise of industrial 
functions. Whatever may be the tendency at a par- 
ticular moment, there is no justification for nourish- 
ing illusions upon the alleged advantages of restric- 
tion over freedom, even although liberty has its 
drawbacks when pushed to the extreme of laisser 
faire. 

The most obvious disadvantage of State collect- 
ivism is the degeneration of the administration into a 
bureaucracy of which red-tape becomes the symbol. 
Under the pressure of red-tape, invention is un- 
doubtedly sterilized. As a matter of fact, the de- 
velopment of the telephone owes nothing to the State 
in any country. It has even been impeded by legis- 
lation and by the fear of the possibility of public 
confiscation. Under the technical conditions of tele- 



INTRODUCTION 3 

phony, it is probable that to no industry is State man- 
agement less readily applicable than to the telephone 
industry. The intricacy of its technique and the 
highly fluid character of its methods mark it off de- 
cisively from certain industries whose technique has 
become settled and whose methods have come to be 
subject to routine. Whether or not industries of 
the latter character may be successfully administered 
by the State is open to discussion on general and on 
special grounds; but experience has shown that the 
methods of State administration are in general too 
cumbersome for their application to rapidly develop- 
ing industries, with the doubtful exception of those 
which are of a definitely military or naval character. 
Even in the latter case experience has also shown the 
immense advantage of the distribution of technical 
skill in private establishments as a reserve which 
may in case of need be diverted to the service of the 
State. Where, from a mistaken view of the public 
interest, the State establishes a monopoly in its own 
favor, the inevitable result is the suppression of in- 
dividual initiative and the absence of reserves of 
technical skill and efficient labor. 

The argument which at the moment is frequently 
employed, that for military purposes in time of peace 
as well as in time of war it is important for the tele- 
phone to be in the hands of the Government, does 
not apply because if the telephone is in private hands 
the Government can in an emergency exercise the 



4 INTRODUCTION 

right of eminent domain and can commandeer the 
telephone service, even if it were not voluntarily 
placed at the disposition of the Government, al- 
though that would undoubtedly be done. Under 
private operation of telephones the Government has 
thus the advantage of having at its disposal a tele- 
phone system developed by private initiative with- 
out cost to itself and much more extensive than any 
which would have been at all likely to have been 
developed under Government auspices. 

In democratic countries the people are in general 
severely censorious about Governmental actions and 
frequently even abusive of the executive Govern- 
ment; but an attitude of this kind is rarely of an 
intimate or effectively critical character, especially 
where the actions in question are connected with the 
operation of a complex industry. The minutiae of 
such an industry are not understood by the public at 
large and if the State is the sole employer of the 
experts, the assistance of these experts is not gen- 
erally available for an examination of the Govern- 
mental operations because they are professionally 
and economically at the mercy of the Government. 
Under the conditions of a competitive system where 
there is no Governmental or other monopoly, criti- 
cism may be continuous and effective. Under con- 
ditions of quasi-monopoly, the visitatorial power 
which is inherent in Governmental administration 
may properly be applied by Government inspectors 



INTRODUCTION 5 

and the public interest in the widest and deepest 
sense may be conserved by the Government, provided 
that the visitatorial power is exercised in an impartial 
manner. Where, however, the Government enters 
into direct competition with private enterprises, its 
visitatorial powers cannot be exercised disinterest- 
edly and must therefore be ineffective ; and where the 
Government exercises a legal monopoly, the visita- 
torial power disappears altogether and there is neces- 
sarily a tendency, not only towards administrative 
stagnation but also towards laxity, incompetence, 
and even fraudulent intromission with public funds. 
Thus a public service which is rendered by persons 
voluntarily cooperating as in a joint stock enterprise, 
when subjected to the possibility of Governmental in- 
spection and criticism by Governmental agents hav- 
ing power to call for the production of all relevant 
data, is more likely to be conducted efficiently than a 
public service rendered directly by Governmental em- 
ployees who are not exposed to effective criticism by 
any constituted body. 

So also financial considerations are decisively 
against overloading Governmental agencies with pe- 
cuniary responsibilities. The investor in Govern- 
ment securities regards as the prime element in their 
saleability, not the alleged assets of the Government 
the value of which he is not competent to judge, nor 
the alleged earning power of any of the enterprises 
in which the Government may engage, for the effi- 



6 INTRODUCTION 

ciency of the management of these enterprises is also 
beyond his knowledge; but the investor regards ex- 
clusively the taxing power of the Government and 
the apparent ability of the people to sustain the bur- 
den of the taxes which are likely to be placed upon 
them. In this estimate of the solvency of a com- 
munity, the aggregate amount of the public debt, 
State and municipal, in relation to the numbers of the 
people is a prime factor. Increase in public indebt- 
edness in excess of the increase of the numbers of the 
people means, therefore, an increase in the rate 
of interest because the security is proportionately 
diminished. In a country where the chief employ- 
ment is agriculture, the principal security upon which 
debt is created is clearly land; and when the aggre- 
gate debt amounts to a high sum per acre of land in 
cultivation, it is time for the investor in public se- 
curities to consider the situation because the taxes 
being the first charge upon the land, the amount of 
these taxes determines all other credits, and defaults 
in tax payments involve flight. If the population 
deserts the land, all other forms of security in the 
country shrivel into no importance. The attitude 
of the investor is, therefore, perfectly sound. 

The experience of every Government shows quite 
conclusively that Governmental management of en- 
terprises of an industrial character is ineconomical. 
The ineconomical management of such enterprises 
arises from the following main causes : 



INTRODUCTION 7 

i° The absence of incentive to economical man- 
agement; 2° the employment of persons on political 
rather than on professional or technical grounds, and 
therefore the employment of a number of persons 
larger than is necessary; 3 the reluctance with which 
the Government appoints persons of superior pro- 
fessional qualifications because of the relatively high 
salaries such employment involves, the employment 
of the cheap official being regarded as most easily 
defensible; 4 the sale of the service, whatever it 
may be, at a price determined also rather on political 
than on technical grounds; and 5 the restriction or 
the absence of competition. 

The consequence of these conditions is that the cost 
to the nation of any service rendered by the Govern- 
ment is always greater than the cost of the same serv- 
ice rendered by competent persons other than those 
in the Government service. This consequence makes 
its appearance even although the functionaries of the 
Government practice the most scrupulous integrity. 
Where corruption enters, the consequences are some- 
times even disastrous. 

The demands of a growing population for the ex- 
tension of Governmental services of a strictly legiti- 
mate character are increasing so steadily that the tax- 
bills as well as the debt of the modern State are sub- 
ject to constant expansion. If in addition to this 
legitimate increase in the amounts taken from the 
pockets of the people and placed at the disposal of 



8 INTRODUCTION 

the Government, the increase of taxes and of debt 
Is amplified by Governmental adventures into inec- 
onomically conducted industrial enterprises, the finan- 
cial fabric of the nation becomes more and more seri- 
ously imperilled. The resources which should be 
available for the promotion of increased production 
are absorbed by the Government, a period of indus- 
trial stagnation supervenes, while individual enter- 
prise and even individuality itself are checked. Un- 
der such conditions the more energetic of the popula- 
tion migrate to some other region where a smaller 
proportion of their earnings is absorbed by the Gov- 
ernment and where they can enjoy a field for their 
powers less hampered by Governmental restrictions. 
This cycle of development has occurred in certain 
European countries, where the reactions of excess of 
Governmental control have worked themselves out. 
The continent of America has indeed been largely 
peopled by emigrants from Europe fleeing not from 
ancient feudal disabilities which have long ceased 
to have any tangible force, but from the modern 
feudalism which subordinates the individual to the 
assumed interests of the nation. 

Even although a State enterprise were conducted 
profitably in a pecuniary sense, there would be a 
net public disadvantage unless the administration 
of it was such as to avoid the injurious effects 
not primarily of a pecuniary character. Too great 
stress is often laid upon the pecuniary factor alike 



INTRODUCTION 9 

by advocates and by opponents of public ownership. 
The public interest is affected not merely by balance 
sheets, but even more importantly by those influences 
not distinctly tangible but nevertheless real which 
contribute, along with the pecuniary factor, to deter- 
mine the movements of population, the efficiency of 
industry, and the character of the people. 

The Manitoba experience of Governmental man- 
agement of the telephones is very instructive because 
it affords an illustration of the fatal weakness of po- 
litical administration of industry. Although the 
scale upon which it has been attempted is small com- 
pared to the scale of a great country, it is neverthe- 
less large in relation to the total activities of the 
Province. The purchase of the telephone system 
doubled the Provincial obligations and the expendi- 
ture on the telephones has formed a very material 
proportion of the total Provincial expenditure. In- 
stead of proceeding cautiously and circumspectly in 
a new adventure as the Government might well have 
done, the Government plunged at once into a rela- 
tively vast extension of the telephone system without 
regard to the cost of it and considering only the tem- 
porary political advantage to the Government then 
in power. The public interest was wholly disre- 
garded. The members of the Government who 
spoke most confidently about the telephone system 
knew, as they themselves admitted afterwards, noth- 
ing whatever about it. They promised things that 



io INTRODUCTION 

in the nature of the case they could not possibly per- 
form; for example, they promised to "cut the rates 
in two." They undertook to manage the telephone 
business without the assistance of superior technical 
advice and superintendence, while they hampered 
their own officers in the performance of their duty 
and handicapped the enterprise by saddling it with 
charges and overcharges of purely political origin. 
The accounts were presented in a manner of which 
no competent chartered accountant could approve 
and to which no such person could put his name with- 
out qualification. The Government pretended to 
entrust the telephone business to the Telephone Com- 
mission and yet from the beginning assiduously used 
the telephone business for political ends, reducing 
the rates without competent technical advice and 
forcing upon the Commission a series of financial 
arrangements of a highly questionable character. 

The representations made by the Manitoba Gov- 
ernment which acquired the system, and even those 
made by the present administration, as to accruing 
profits are absolutely without foundation. Until the 
Government writes off the amount which its own 
auditor regards as the excess value of the plant, as 
shown by the books, over the real construction cost 
of the plant, it is idle to talk of profits. Strictly 
speaking, the Manitoba Government Telephones 
have up till the present time involved the Province in 
a loss of upwards of a million dollars. This sum 



INTRODUCTION n 

ought properly to be provided without delay out of 
the general resources of the Province from taxation 
and placed in a fund in the hands of trustees inde- 
pendent of the Government for the security of the 
holders of the Telephone debentures and stock; 
otherwise these securities must in effect be depre- 
ciated by about ten per cent, taking into ac- 
count the losses of the past alone and taking no 
account of the losses of the future. The politi- 
cian accustomed to vague rhetorical generalities is 
used to denouncing all serious criticism; but the in- 
vestor is not always easily deluded and one day the 
Province of Manitoba will find in a restricted money 
market and an abnormal rate of interest the conse- 
quences of the failure of its executive Government 
to transact its business in a businesslike way. 

Among the financial reactions of the war must un- 
doubtedly be the increase of the public debt of Eu- 
rope, the great increase of the fund holding classes, 
and the urgent necessity for State economy. This 
economy can only be effected if the State relinquishes 
all but its necessary and obvious functions and re- 
frains from increasing its total obligations. Only by 
such means can normal social conditions be re-estab- 
lished. Unless on the American continent a similar 
restrictive policy as regards State action be adopted, 
America will find itself burdened by overwhelming 
public obligations with all the social reactions to 
which these obligations give rise. 



12 INTRODUCTION 

The entire history of the Government telephone 
enterprise in Manitoba affords evidence of the most 
positive character against Government ownership. 
Practically all of the defects which have emerged 
elsewhere in the management of industries by State 
officials have made their appearance in the case of 
the Manitoba Telephones. The management has 
been ineconomical, the enterprise has been handi- 
capped by political intrigue, the finances mingled as 
they have been with the general finances of the Prov- 
ince have been unsoundly administered from the be- 
ginning, and the obligations of the public have been 
enormously increased without adequate compensa- 
tory advantages. 

It is possible that only by repeated and costly 
failures such as the Manitoba Government Tele- 
phones, will the public realize that the proper func- 
tion of Government is not the conduct of industries 
but the impartial inspection of them under intelli- 
gent laws adapted to the character and conditions of 
the community and the country. 



THE ACQUISITION OF THE BELL 
SYSTEM 

EARLY TELEPHONE DEVELOPMENT UNDER 
PRIVATE ENTERPRISE 

Public telephone service in the Province of Man- 
itoba was first given in 1880 by a private individual 
who opened a telephone exchange in Winnipeg and 
charged an annual flat rate of $60 per instrument. 
In 1 88 1, however, this exchange was purchased by 
the Bell Telephone Company of Canada, which, in 
1882, established exchanges in Brandon and Portage 
la Prairie. 1 The Bell Telephone Company began 
its service at a time when there were only some 
60,000 people in the entire Province, when the popu- 
lation of Winnipeg was only 8,000, and when Bran- 
don and Portage la Prairie were only villages. 2 As 
early as 1884, there were 340 subscribers in Winni- 
peg, 3 a large number in proportion to the popula- 
tion at that time. Credit, therefore, is justly due 
the Bell Company for assuming the burdens and the 
risks of a pioneer, for anticipating the needs of the 

1 The Winnipeg Telegram, January 16, 1908. 

2 Cf. Fifth Census of Canada, 191 1, vol. i, pp. 522, 554-555. 

3 The Winnipeg Telegram, January 16, 1908. 

13 



i 4 GOVERNMENT TELEPHONES 

public, and for developing a substantial business to 
serve the public. 

Moreover, the successful development of the busi- 
ness was not a matter of smooth sailing; the eco- 
nomic seas in those days were extremely turbulent 
and often treacherous. Although a period of boom 
and prosperity accompanied the completion of the 
extension of the Canadian Pacific Railway to the 
Pacific Coast in 1886-87, yet the telephone industry 
at that time was too young to participate in the gen- 
eral expansion. Somewhat later, the growth of the 
business was retarded by the local depression which, 
beginning in 1888-89, continued for several years, 

— a depression which had as one of its causes a de- 
crease in immigration. Furthermore, when a vig- 
orous immigration movement again set in — in 1895 

— the nature of the immigration was such that little 
impetus was given to telephone development, for 
during the period 1 895-1900 the immigrants were 
predominantly of the peasant class with slender 
knowledge of the English language, self-contained 
habits, and small purchasing power. Thus it is ob- 
vious that up to 1900 the telephone business could 
not grow otherwise than slowly. Nevertheless, it 
is found that in 1900 the Bell Telephone Company 
served more subscribers, in proportion to population, 
in each of the towns of Winnipeg, Brandon and 
Portage la Prairie 4 than are served to-day in the 

4 Cf . The Winnipeg Telegram, January 16, 1908. 



ACQUISITION OF BELL SYSTEM 15 

Government-developed systems in Rome, Paris or 
Vienna. It was not until after 1900 that a rapid 
expansion of the service in Manitoba became possi- 
ble. Between 1900 and 1908 the service did expand 
rapidly and the Bell Company anticipated and pre- 
pared for still further expansion. 5 

POLITICAL AGITATION FOR PUBLIC OWNERSHIP 
OF TELEPHONES 

In 1898 there arose, chiefly in the sparsely settled 
11 rural municipalities," 6 a mild sentiment in favor 
of the installation and operation of telephone ex- 
changes by municipal authorities. The first munici- 
pality to take up the matter actively was Neepawa, 
which had slightly more than 1,000 inhabitants. It 
was found, however, that the Municipal Act of the 
Province did not endow municipalities with power to 
establish commercial undertakings. Consequently, 
despite the fact that as a whole the municipalities 
were not anxious to embark in a venture involving 
the provision and risk of capital, to meet the individ- 
ual case of Neepawa and to provide for a few sim- 
ilar cases, in 1899 the Provincial Legislature passed 
an Act permitting municipal ownership and opera- 
tion of local exchanges. 7 

5 Cf. pp. 26-28, infra. 

6 In Manitoba " rural municipalities " comprise rural territory 
exclusively. They are somewhat analogous to rural counties in 
Eastern Canada and in the United States. 

7 Statutes of Manitoba, 62-63 Vic, 1899, ca P- 2 5- Cf. also The 
Winnipeg Telegram, February 4, 1908. 



1 6 GOVERNMENT TELEPHONES 

Since the municipal exchanges established under 
this Act were' not entitled to connect with the long 
distance lines of the Bell Telephone Company, the 
Manitoba Government then began to consider, 
though in a rather vague and abstract manner, the 
expediency of constructing and operating long dis- 
tance lines. No tangible action was taken until 
1905, when, on January 26th, the Select Standing 
Committee on Private Bills of the Provincial Legis- 
lature, in a report rejecting the application of two 
embryo telephone companies 8 for charters of in- 
corporation, recommended that during the legisla- 
tive recess the Provincial Government should in- 
quire into the whole subject of telephone service 
with a view to initiating public ownership and ope- 
ration. 9 The Government accepted the responsibil- 
ity for this recommendation and promised a thorough 
investigation. 10 To use the Premier's own word, 
this investigation took the form of a " quiet " inquiry 
on the part of himself and the Minister of Public 
Works. 11 It is worthy of note, however, that the 
Government at about the same time requested the 
Dominion Government to amend the charter of the 
Bell Telephone Company so as to empower the 

8 The Independent Telephone Company of Canada and the North- 
west Telephone Company. 

9 Journals of the Legislative Assembly of Manitoba, Session 1904.-5, 

P. 73- 

10 The Winnipeg Telegram, January 27, 1905. 

11 The Manitoba Free Press, Winnipeg, November 24, 1905. 



ACQUISITION OF BELL SYSTEM 17 

Provincial Government to expropriate the Company's 
property in Manitoba. 12 As the granting of any 
such request would obviously have seriously impaired 
the value of all charters whatsoever, the request was 
naturally refused. 13 

As a result of the " quiet " inquiry of the Premier 
and the Minister of Public Works, the Government 
resolved to commit itself to a specific policy of pub- 
lic ownership of telephones. The first definite an- 
nouncement of this policy was made in a speech by 
the Premier on November 23, 1905. In this speech 
the Premier stated: 

11 The government is now prepared to recommend 
to the (Provincial) legislature the establishment of 
a telephone system in the province of Manitoba to 
be owned and controlled by the municipalities and the 
government jointly. ... 

" We have reached this conclusion from the fact 
that the telephone is, and must be, necessarily one of 
the natural monopolies, and yet is one of the most 
desirable and necessary facilities for the despatch of 
business and for the convenience and pleasure of the 
people. Therefore, the price of telephones should 
be made so low that laboring men and artisans can 
have the convenience and advantage of the telephone, 
as well as the merchant, the professional man and 

12 Cf. Journals of the Legislative Assembly of Manitoba, Session 
1906, pp. 97-98. 

13 Cf. The Ottawa Free Press, April 26, 1906; The Citizen, Ot- 
tawa, April 28, 1906; The Herald, Montreal, September 15, 1906. 



1 8 GOVERNMENT TELEPHONES 

the gentleman of wealth and leisure, and it is our in- 
tention to recommend to parliament (i. e., the Pro- 
vincial Legislature) a proposition of this kind with a 
view of giving a telephone system to all classes at 
cost." 14 

This announcement of the telephone policy 
adopted by the Government is highly significant in 
two respects. In the first place, the program con- 
templated by the Government provided that the local 
(exchange) service should be operated by the 
municipalities and that only the long distance lines 
should be controlled by the Provincial Government. 
Secondly, and more important still, is the fact that 
the only reason advanced for the adoption of the 
new policy was that rates could he considerably re- 
duced under public ownership, since service would be 
given at cost. Absolutely no objection was taken to 
the character of the service furnished by the Bell 
Telephone Company. The public press, even while 
supporting the doctrine of public ownership, admit- 
ted that the Bell service was " efficient and satisfac- 
tory." 15 Throughout the politically-conducted agi- 
tation for public ownership of telephones, the dis- 
cussion centered around the question of rates; all 
later references by the politicians to the quality of 
the service were purely incidental and secondary. 

Although the Government had thus already com- 

14 The Manitoba Free Press, Winnipeg, November 24, 1905. 

15 The Manitoba Free Press, Winnipeg, November 25, 1905. 



ACQUISITION OF BELL SYSTEM 19 

mitted itself to a policy of public ownership, never- 
theless in its session of 1906 (January 29, 1906) 
the Provincial Legislature, on the motion of the 
Government, appointed a committee to inquire into 
the telephone question. 16 The chairman of this 
committee was the Attorney-General of the Province. 
[The committee took evidence in Manitoba and in- 
spected the independent telephone systems in several 
United States cities and, on February 27, 1906, 
made its report, which consisted of a series of reso- 
lutions to the effect that 

(a) The telephone should be owned and oper- 
ated as a Government and municipal undertaking; 

(b) The existing rates in Manitoba were exor- 
bitant and could be considerably reduced; 

(c) The Government should build the long dis- 
tance lines and the municipalities should supply the 
local systems. 17 

On February 28, 1906, the Government brought 
before the Legislature a Bill based on these resolu- 
tions. 18 In a lengthy speech introducing the Bill, the 
Attorney-General contended that the Bell Company's 
" theory " that unit costs increased with the number 
of telephones in use, was " fallacious," and declared: 
11 I am satisfied that the present rates in Canada 
could be cut in two and still leave a very satisfactory 

^Journals of the Legislative Assembly of Manitoba, Session igo6, 

P- 35- 

17 Ibid., pp. 88-90. 

18 Ibid., p. 94. 



20 GOVERNMENT TELEPHONES 

profit." 19 The Bill passed the Legislature, and be- 
came law on March 16; 20 but the Government were 
content with having secured what they regarded as 
statutory sanction for whatever course they might 
eventually decide to pursue, and they took no imme- 
diate action toward carrying out their policy. 

The political situation in Manitoba in 1906 was 
such that, in view of the approaching elections, both 
the party in power and the Opposition were desirous 
of bringing forward some project which might 
be popular without being politically dangerous. 
Such questions as the question of compulsory educa- 
tion were considered too complicated and too thorny 
to be injected into the political arena. The question 
of public ownership of telephones, on the other hand, 
was assumed to be both a simple one and one which 
would be immediately popular, as telephone service 
could readily be offered to everybody at cost. Both 
parties, therefore, sought to advance their political 
fortunes by advocating public ownership : the propo- 
sition of the party in power was the combined Gov- 
ernment and municipal system already described, 
whereas the Opposition — as a plank in its politi- 
cal platform — urged that both local and long dis- 
tance service be operated by the Government. 21 

19 Resolutions and Memorials of the Legislative Assembly of 
Manitoba respecting Public Telephones. Winnipeg, 1906. 

20 Statutes of Manitoba, 5-6 Edw. VII, 1906, cap. 89. 

21 Cf. the Manitoba Free Press, Winnipeg, February 20, 1907. 



ACQUISITION OF BELL SYSTEM 21 

SUBSTANTIAL REDUCTION IN TELEPHONE RATES 
PROMISED UNDER PUBLIC OWNERSHIP 

Although the members of the Government knew 
nothing about the telephone business (a fact which 
they admitted afterwards 22 ), nevertheless through- 
out the campaigns which preceded the municipal elec- 
tion of December, 1906, and the general election of 
1907 they continued to make high-sounding and reck- 
less promises regarding the rate reductions which 
could be effected under their proposed policy. The 
chief spokesmen of the Government were the 
Premier and the Attorney-General. On September 
5, 1906, the latter publicly declared that M the Gov- 
ernment will be able to accomplish a result that will 
cut the cost of the telephone in two.'' 23 In an in- 
terview published on December 10, the same official 
said : " In the country the reduction will be one-half 
the existing rates." 24 On the same day the Premier 
said: " It is simply a matter of those who use tele- 
phones paying for them, and also, only to pay half 
what the Bell people now charge. " 25 Three or four 
days later the Premier said: "We will more than 
cut the Bell figure in two''; 28 and, speaking in 
Xeepawa on December 20th, he said that by one 

22 Cf. p. 96, infra. 

23 Speech before the Canadian Independent Telephone Associa- 
tion, September 5, 1906. 

24 The Winnipeg Telegram, December 10, 1906. 

25 The Winnipeg Telegram, December n, 1906. 

26 The Winnipeg Telegram, December 15, 1906. 



22 GOVERNMENT TELEPHONES 

year from that time " they would be able to speak 
over a Government-owned long distance line from 
Neepawa to Winnipeg at less than half what is 
charged by the Bell Telephone Company at the pres- 
ent time." 27 These glib promises are typical of 
many others which the Government asked the voters 
of the Province to believe. 

Some months after the Government had openly 
committed itself to a policy of public ownership and 
after promises to cut the Bell rates in two had al- 
ready been made, the Government perceived that 
it would be advisable to give the case the appear- 
ance of being founded on a substantial and scien- 
tific basis. Consequently, on August 21, 1906, it 
called to its aid a telephone expert who was known 
to agree with the Government's contention that rates 
could be greatly reduced. As a matter of fact, how- 
ever, this expert was secured primarily to direct " a 
campaign of education along telephone lines," 28 that 
is, he was to be the publicity manager for the Gov- 
ernment's proposal. In that capacity the expert im- 
mediately plunged into the thick of the political cam- 
paign, making speeches throughout the Province in 
which he addressed himself especially to the farmer. 
For example, at Brandon, on October 29, 1906, he 
said: " In regard to the price at which a telephone 

27 The Winnipeg Telegram, December 21, 1906. 

28 Letter of Attorney-General requesting the services of the ex- 
pert; quoted by the expert in a speech at Brandon, Oct. 29, 1906, re- 
ported in the Manitoba Free Press, Winnipeg, Oct. 30, 1906. 



ACQUISITION OF BELL SYSTEM 23 

service can be provided by the Government, I might 
say that it is absolutely certain that the majority of 
your farmers can obtain rural service at $12 a year, 
and that the residents of every municipality can ob- 
tain a telephone at the same rate." 29 Again, at 
Birtle, on October 31st, he said: " We are abso- 
lutely satisfied that with few exceptions every farmer 
in this Province can be supplied with telephone serv- 
ice at the rate of $1.00 per month. I know the Bell 
Telephone Company will take exception to that." 30 
As a climax to the campaign preceding the municipal 
elections the Government issued and widely circulated 
a pamphlet by this expert. 31 This pamphlet was 
primarily designed to influence the voters in the rural 
districts and in it were reiterated the statements that 
a rural telephone service could be furnished for $1.00 
a month. 32 

CONSTRUCTION BY THE GOVERNMENT OF A COM- 
PETITIVE TELEPHONE SYSTEM BEGUN IN 1907 

In order to ascertain the measure of popular sup- 
port which would be accorded an immediate execu- 

29 The Manitoba Free Press, Winnipeg, October 30, 1906. 

30 The Manitoba Free Press, Winnipeg, November 3, 1906. 

31 The Manitoba Government and Public Ownership of Tele- 
phones, Winnipeg, 1906. 

32 Although the Government later endeavored to throw upon 
their expert the responsibility for their failure to fulfill their prom- 
ises, it should be observed that the Government had entered upon 
their career of extravagant promise long before the advent of the 
expert, whose views, also, were known to the Government before 
his services were engaged. 



24 GOVERNMENT TELEPHONES 

tion of their scheme of joint Government and mu- 
nicipal ownership, the Government had arranged 
that the following question should be submitted to 
the voters in each municipality at the municipal elec- 
tions in December, 1906: Shall this municipality 
own and operate its own telephones? The vote pur- 
ported to be a test vote pure and simple : an answer 
in the negative would mean that the municipality 
would refuse to construct a local system in coopera- 
tion with the Government; an answer in the affirma- 
tive would signify merely that the Municipal Coun- 
cil, at its own discretion, could take steps to install a 
local system in pursuance of the Government's gen- 
eral scheme. 33 In spite of the fact that the promises 
of the Government on the eve of the election were 
unusually reckless, and although the aggregate popu- 
lar vote favored the affirmative, a majority of the 
municipalities of the Province declined to cooperate 
with the Government. 34 The Government, however, 
obstinately refused to accept the result of the vote 
es a rejection of its policy; on the contrary, it was 
actually interpreted not only as an endorsement of 
the plan, but even as a direct mandate from the 
people to carry out the program of joint Govern- 
ment and municipal ownership. The Government 
therefore began to urge the installation of exchanges 

33 Statutes of Manitoba, 5-6 Edw. VII, 1906, cap. 90. Cf. the 
Manitoba Free Press, Winnipeg, September 29, 1906. 

34 The Manitoba Free Press, February 12, 1907. 



ACQUISITION OF BELL SYSTEM 25 

by municipal authorities, and it prepared to begin 
the construction of some long distance lines, relying 
upon the power conferred by the Act of March 16, 
1906. 

The general elections were held in 1907 and the 
Government was returned to office. Thereupon the 
Government immediately announced that its pro- 
posed telephone policy was vindicated and that it 
was supported by public opinion. 35 At the same 
time it found itself in a position to take effective 
action, for the financial position of the Province had 
been considerably improved between 1900 and 
1907. 36 It was soon learned, however, that the 
vote of the municipal elections was not meaningless 
and that the municipalities would not install local ex- 
changes as they were expected to do. Even the mu- 
nicipality of Winnipeg, where for several years there 
had been an intermittent agitation for a local mu- 
nicipal system, refused to submit to the Government's 
proposition. 37 The Government, therefore, was 
confronted by a dilemma : either to abandon the pro- 
posed scheme altogether or to embark upon a Gov- 
ernment-owned system of local exchanges as well as 
of long distance lines, which was exactly the policy 

35 Cf. Letter of the Premier to the President of the Bell Telephone 
Company, dated Winnipeg, March n, 1907. Sessional Papers. 
Legislative Assembly of Manitoba. Session IQ08, p. 356. 

36 Cf. Public Accounts of the Province of Manitoba for the re- 
spective years. These Accounts are printed as Sessional Paper No. 
1 in the Sessional Papers of each year. 

37 The Manitoba Free Press, Winnipeg, April 4, 1907. 



26 GOVERNMENT TELEPHONES 

advocated by the Opposition. The Government 
chose the latter course as the lesser of the two evils 
and inaugurated the new program by issuing Pro- 
vincial bonds to the amount of one million dollars, 
with the proceeds of which the construction was 
begun in September, 1907, of a telephone exchange 
in Winnipeg in opposition to the local system of the 
Bell Company. 38 

GOVERNMENT PURCHASE OF THE EXTENSIVE SYS- 
TEM OF THE BELL COMPANY, DECEM- 
BER 30, 1907 

It is necessary to pause an instant at this point to 
direct attention again to the important fact that dur- 
ing 1906 and 1907 the Bell Telephone Company 
vastly improved and increased its plant and extended 
its service. As the Opposition seems to have over- 
looked this significant fact in their later criticisms, 
the following statement has been taken from the 
columns of the leading Opposition newspaper of the 
Province : 

" On February 21, 1906, Lewis B. McFarlane, 
general manager of the Bell Telephone Company of 
Canada, . . . stated that the capital investment of 
the company in Manitoba (on December 31, 1905) 
was $1,360,787. . . . 

"In the year 1906 the Bell spent approximately 

38 The Manitoba Free Press, Winnipeg, September 6, 1907. 



ACQUISITION OF BELL SYSTEM 27 

$1,000,000 in Manitoba in various works, putting in 
new switchboards, new conduit work and long dis- 
tance wiring. During the last year a new exchange 
building has been erected in Fort Rouge at a cost of 
$40,000, and a great deal of the underground and 
cable work has been done preparatory to opening 
this exchange. Then there has been a large addition 
to the Winnipeg switchboard. A modern central 
energy, multiple switchboard has been installed in 
Brandon, and the whole work in the city has been re- 
constructed. . . . 

" In 1905 there were 6,224 subscribers and 892 
miles of long distance and rural lines. To-day there 
are more than 14,000 subscribers in the province and 
more than 2,500 miles of pole lines." 39 

In other words, this Opposition statement shows 
that during one year (1906) the plant investment of 
the Bell Company had almost been doubled, while 
the number of subscribers was more than doubled 
during the two years 1906 and 1907. Moreover, in 
a speech before the Legislature on February 13, 
1908, 40 the Premier stated that in 1907 over $700,- 
000 was expended on the Bell system, an amount 
which, although less than the expenditure in 1906, 
was still over one-half as great as the entire invest- 
ment up till December 31, 1905. In view of this re- 

39 The Manitoba Free Press, Winnipeg, January i, 1908. 

40 The Winnipeg Telegram, February 14, 1908. 



28 GOVERNMENT TELEPHONES 

markable growth, the Bell Telephone Company cer- 
tainly seems adequately to have met the real demands 
of a period of prosperity and expansion. 

The Government realized that to compete with the 
Bell would be an extremely hazardous venture; and 
it considered that it would be much more economical 
and advantageous to buy a ready-made system than 
to go through the slow and laborious process of build- 
ing up a business of its own. The effort to obtain 
authorization to expropriate the property of the Bell 
Company having proved futile, 41 on December 12, 
1907, the Government asked Mr. Sise, President of 
the Bell Company, to come to Winnipeg in order to 
discuss the project of a purchase of the Bell system 
in Manitoba. Mr. Sise responded, but set a price 
of $4,000,000 on the Bell property, stating that he 
did not anticipate that the Bell would suffer by the 
introduction of the Government-owned system and 
that he did not want to sell. After negotiations an 
agreement was, however, effected, and on December 
30, 1907, the Bell property and business in Mani- 
toba was purchased by the Government for $3,300,- 
000 — since there were 14,042 Bell telephones at 
the date of transfer, a price equivalent to $235 per 
telephone — a further sum of $100,000 being paid 
for supplies. The Government was to assume 
charge of the plant on January 15, 1908. To meet 

41 Cf. pp. 16-17, supra. 



ACQUISITION OF BELL SYSTEM 29 

the purchase price the Government issued $3,500,- 
000 of 4% Provincial bonds, $100,000 of these 
bonds being held in reserve by the Treasury Depart- 
ment. Although the bonds could not have sold at 
that time for more than 92 or 93, the Bell Telephone 
Company accepted them in payment at par value. 42 

The Opposition complained that the purchase was 
rushed through within two days before the opening 
of the legislative session; but the Government cited 
the Act of March 16, 1906, as sufficient authority 
for their action and they never submitted the specific 
transaction to the representatives of the people for 
ratification. The Opposition also contended that the 
Bell plant was out-of-date and criticized the price 
paid by the Government as excessive. The main 
points of the Government's answer to these criticisms 
were as follows. The Government pointed out : 

(a) That the Chief Engineer of the Provincial 
Department of Railways, Telephones and Tele- 
graphs had reported (1) that the construction of the 
Bell plant " has been well done, and is up to modern 
practice generally "; and (2) that " the physical 

42 Letter of the Premier to the President of the Bell Telephone 
Company, dated Winnipeg, Dec. 30, 1907. Sessional Papers. Leg- 
islative Assembly of Manitoba. Session 1908, p. 359. Cf. the Mani- 
toba Free Press, Winnipeg, January 1, 1908. The original docu- 
ments prove that the overtures in the transaction were made by the 
Government as early as March, 1907. Cf. correspondence between 
the Premier and the President of the Bell Company. Sessional 
Papers. Legislative Assembly of Manitoba. Session IQ08, p. 356 
et seq. 



3 o GOVERNMENT TELEPHONES 

plant is in a good state of repair, and is being kept 
so"; 43 

(b) That at the time of purchase between 30 
and 40 per cent, of the Bell plant represented ad- 
vance construction for future needs; 44 

(c) That the depreciated value of the Bell plant 
had been placed at $3,210,098 by the Chief Engineer 
of the Provincial Department of Railways, Tele- 
phones and Telegraphs; 45 

(d) That the criticisms were largely based on the 
state of the company's plant in 1905, whereas the 
plant had been much more than doubled in 1906 and 
1907 ; 46 

(e) That competition with the Bell Company 
would have been costly, while the number of Bell tel- 
ephones was so great that there was no room for a 
dual system ; 47 

(f) That an allowance of 10 per cent, should be 
added to the plant value on account of forced sale, 
franchise, and good will; 48 

(g) That the discount on the bonds given in pay- 
ment was at least 7^ per cent.; 49 

43 Report of Chief Engineer, Department of Railways, Telephones 
and Telegraphs, dated Winnipeg, Dec. 28th, 1907. Sessional Pa- 
pers. Legislative Assembly of Manitoba. Session iqo8, pp. 364-368. 

44 Ibid. 
4 * Ibid. 

46 Speech of the Premier to the Legislature, February 13, 1908; 
reported in The Winnipeg Telegram, February 14, 1908. 

47 Ibid. 

48 Ibid. 
**Ibid. 



ACQUISITION OF BELL SYSTEM 31 

(h) That the purchase of a going concern elim- 
inated the necessity for the payment of interest on 
the large amount of capital invested in non-revenue- 
producing plant during the period of construction, 50 

Although the answer of the Government has never 
had any appreciable effect on its critics, the im- 
partial observer cannot fail to be impressed with the 
strength of the Government's case. In view of the 
numerous intangibles which the Government pointed 
out were legitimately involved in the purchase, the 
fairness of the price cannot be determined from any 
mere valuation of the plant. At the time the pur- 
chase was effected the Opposition press admitted that 
11 at the present market price of provincial bonds the 
price paid for the system at the present time is, in 
round figures, about $3,000,000." 51 If similar al- 
lowances be made for the other factors besides bond 
discount, there is no escape from the conclusion that 
the price paid for the plant and its inseparable in- 
tangibles was not unreasonable. 

The result of the transaction was that the debt of 
the Province was doubled at a stroke, while the Prov- 
ince, without fully realizing it, had committed itself 
to still larger expenditures for future telephone pur- 
poses. Moreover, it should have been realized, 
though it was not, that these expenditures would in- 
evitably prevent expenditures in public works which 

50 Speech of the Premier to the Legislature, February 13, 1908. 

51 The Manitoba Free Press, Winnipeg, January 1, 1908. 



3 2 GOVERNMENT TELEPHONES 

might be undertaken as belonging to unquestionably 
Governmental functions. Thus, when at a later 
date the development of the extensive water powers 
of the Province was proposed, 52 the Province was 
unable to undertake this important public work be- 
cause its credit was so deeply involved in the tele- 
phone enterprise that the necessary funds could not 
be procured. 

PROMISES OF THE GOVERNMENT AS TO REDUCTION 

OF RATES, COMMERCIAL MANAGEMENT, AND 

PROFITABLE OPERATION 

Immediately upon the announcement of the ac- 
quisition of the Bell system, the Government re- 
newed its pre-election pledges as to reduction of 
rates 53 and as to profitable operation. The Min- 
ister of Railways, Telephones and Telegraphs 54 
even went so far as to estimate the expected amount 
of profit and announced that, after the deduction of 
all interest and sinking fund charges, there would be 

52 Cf. the report on the Projected Hydro-Electric System for the 
Province of Manitoba, by H. A. Robson, K. C, formerly Public 
Utilities Commissioner. 

53 It should be noted that the promises as to rates which were made 
before the purchase of the Bell system was contemplated, were by 
no means prejudicially affected by the eventual purchase; indeed, 
the sole effect of the purchase would be to facilitate the fulfillment 
of these promises, inasmuch as the purchase was consummated by the 
Government as being, in the end, more economical and advan- 
tageous than the construction of a public-owned system. 

54 A Department of Raalways, Telephones and Telegraphs, with 
a small technical staff, had been created as early as March, 1907. 
Cf. the Manitoba Free Press, Winnipeg, March 16, 1907. 



ACQUISITION OF BELL SYSTEM 33 

an annual surplus of over $30,000, and that this 
amount would be increased to over $100,000 by the 
elimination of head office expenses, which were de- 
clared to be unnecessary. 55 The Government also 
undertook another public pledge and declared its 
intention of managing the telephone system as a com- 
mercial undertaking, i. e., on a strictly business basis, 
without political partisanship or influence. On the 
very day of the purchase, the Premier stated : " We 
shall operate the system by a commission, which will 
be free from all partyism." 56 In speaking of the 
contemplated Commission before the Legislature on 
January 7, 1908, the Premier said: "We have 
reached the conclusion that it is in the public interest 
that that commission . . . shall be free, as far as it 
is possible to make it, from party or political influ- 
ence. . . . We have reached this conclusion for the 
reason that it is a commercial business; that it enters 
into the life and business of every home and office 
that uses a telephone; that the service to be efficient 
and satisfactory must be of the very best type or 
kind; and to secure that we must have men in charge 
who have no interests to serve — who are subject to 
no influence other than such as is of a telephone kind 
or character. . . . And as the credit of the prov- 
ince has been used to purchase this service, it is the 
bounden duty of the government ... to place the 

55 The Manitoba Free Press, Winnipeg, February 4, 1908. 

56 The Manitoba Free Press, Winnipeg, January 1, 1908. 



34 GOVERNMENT TELEPHONES 

service in the hands of men whose life business is to 
give a telephone-user the best service possible, and 
have him realize that anything that is done is with 
a view of bettering the service, and is not done from 
a political or a party motive or influence." 57 Speak- 
ing before the Legislature on February 13, 1908, the 
Premier said: " It is the settled policy of the gov- 
ernment and those who support it, that there shall be 
no influence exercised or used upon that commission 
in any way, in so far as it affects the management and 
operation of that system. We want the system to 
be an ideal one, one that will enjoy the confidence 
of my honorable friends opposite " ■ — i. e. the Op- 
position — " to as great an extent as it enjoys the 
confidence of the gentlemen on this side " — i. e. the 
Government party. " We feel that it must be kept 
clean and clear of all party politics or influence." 58 

To recapitulate, in order to make political capital, 
both political parties in Manitoba diligently pro- 
moted a belief that the people of the Province were 
paying tribute, in the form of exorbitant charges, 
to the limitless greed of a conscienceless octopus. In 
those days little effort was required to arouse a 
popular sentiment against any relatively large vested 
interest. It was but natural, then, that within a 
comparatively short time the shrewd politicians were 
safely able to force the telephone question to the 

57 The Manitoba Free Press, Winnipeg, January 8, 1908. 

58 The Winnipeg Telegram, February 14, 1908. 



ACQUISITION OF BELL SYSTEM 35 

front. These politicians, too, did not fail to grasp 
the usefulness of a promised rate reduction as a 
vote-catching device. Government ownership of 
telephones was adopted in Manitoba, not because of 
dissatisfaction w r ith the quality and efficiency of the 
service furnished by the Bell Telephone Company 
and not because of any administrative abuses on the 
part of that company, but primarily as a means of 
reducing rates to the end that political advantage 
might be secured by the Government. 

For the purpose of securing popular support, the 
Government made a number of definite promises 
both before and after the acquisition of a public- 
owned telephone system. Among these promises 
were three cardinal pledges, explicitly and unequiv- 
ocally undertaken: 

1. That the Bell rates would be greatly reduced, 
11 cut in two " being the term generally employed; 

2. That the entire cost of operating the service 
would be borne by the telephone users, i. e., that the 
system would be self-supporting; 

3. That the management of the system would be 
on a strictly commercial basis, absolutely free from 
political considerations or influence. 

In considering the history of the Government tel- 
ephone enterprise, these pledges must constantly be 
borne in mind. 



II 

THE GOVERNMENT SYSTEM UNDER 
THE FIRST COMMISSION 

TELEPHONE MANAGEMENT VESTED IN A COMMIS- 
SION UNDER THE CONTROL OF THE 
GOVERNMENT 

The management of the Government's newly- 
acquired system was committed to a Telephone Com- 
mission of three members, this Commission being 
nominally independent but actually subordinated to 
a Department of Telephones and Telegraphs, pre- 
sided over by a Cabinet Minister. The Commis- 
sioners appointed by the Government were men of 
many years' telephone experience in the service of 
the Bell Telephone Company in the Northwest and 
were unquestionably well qualified for the task of 
managing a telephone system under normal condi- 
tions. 1 Moreover, all three were recognized not 
only by the Company and by the Government, but 
also by the public, as men of high personal character 
and as entirely detached from any political affilia- 
tion. These Commissioners were Mr. F. C. Pater- 

1 Cf. The Gazette, Montreal, January 4, 1908. 

36 



UNDER FIRST COMMISSION 37 

son, who was appointed Chairman, Mr. W. H. 
Hayes, the Commissioner Engineer, and Mr. H. 
J. Horan, the Commissioner Auditor. The salary 
of the Chairman was fixed at $5,000 per annum; the 
salaries of the two other members were set at $3,000 
each. 2 It is inconceivable that men of such proved 
ability should suddenly become incompetent; if in- 
efficiency and extravagance appear, they must be 
charged to causes beyond the control of the Com- 
mission. 

The Commissioners were officially appointed on 
January 15, 1908, and took up their duties on that 
day. The functions of the Commission, as origin- 
ally fixed, gave it the power to operate the system, 
to appoint and discharge employees, to fix rates, and 
to connect subscribers to the system, provided that 
if the cost of such connection exceeded $500, the ap- 
proval of the Minister of Telephones and Tele- 
graphs must first be obtained. 3 The Commission 
was not empowered to purchase supplies, but was re- 
quired to send requisitions for all supplies to the 
Minister at least three months before the supplies 
were needed; and the Minister retained an engineer- 
ing staff of his own in control of construction. 4 At 

2 Order-in-Council No. 12545. Sessional Paper No. 14. Ses- 
sional Papers. Legislative Assembly of Manitoba. Session iqo8, 

PP- 574-5- 

*Ibid. 

4 Order-in-Council No. 12545. Cf. Statutes of Manitoba, 7-8 Edw. 
VII, 1908, cap. 63. 



38 GOVERNMENT TELEPHONES 

this point it should be observed that, whereas in the 
Bell Company's organization the local administrative 
officers were subject to the supervision of, and re- 
ceived assistance from, the staff of experts at head- 
quarters (Montreal), when the Commissioners en- 
tered the service of the Manitoba Government they 
found themselves suddenly deprived of the assistance 
which they had received from the Montreal staff of 
the Bell Company, all supervision and control being 
vested in the Minister, or, in reality, in a group of 
politicians who had no knowledge whatever of the 
telephone business. 

TELEPHONE POLICIES DETERMINED BY POLITICAL 
CONSIDERATIONS; GOVERNMENTAL INTERFER- 
ENCE IN THE TELEPHONE MANAGEMENT 

In spite of the Government's explicit pledge that 
political considerations would be eliminated from 
the telephone management, such considerations ap- 
peared at the very outset and, as a matter of fact, 
dominated the Telephone Commission throughout 
its existence. The first effect of political control was, 
perhaps, in the matter of construction. The votes 
of the farming population being essential to the po- 
litical welfare of the Government, the Government, 
once in control of the system, made haste to curry 
favor with the farmer by forcing the Commission to 
adopt a policy of rapid extension of rural lines with- 
out regard to the legitimate demand for this exten- 



UNDER FIRST COMMISSION 39 

sion of the service. There can be no doubt that the 
Commissioners pointed out the detrimental effects 
such an unscientific and unnecessary policy would 
have both upon expenses and upon organization; 5 
but remonstrance on the part of the Commissioners 
was futile, since they were dealing with, and were 
under the control of, astute politicians whose sole 
object was the retention of political power. 6 More- 
over, the policy of rapid construction included the 
provision of a considerable amount of free service 
and other discriminations in the rural districts, which 
were also in violation of the promise of non-partisan 
commercial management. 7 

Nor were these the only immediate effects of the 
political influence which surrounded the administra- 
tion of the system. Even in matters of detail the 
Commission was subjected to pressure by members 
of the Provincial Cabinet. For example, after the 
Government's acquisition of the telephone system, 
one of the members of the Government exerted 
an irresistible influence upon the Commission to 
requisition an excessive number of poles, since the 

5 Cf. Stenographic Report of Evidence before the Royal Commis- 
sion of Inquiry 1912 (typewritten), vol. i, p. 35 et seq. This Re- 
port is mentioned on p. 97 infra and is hereafter cited as Steno- 
graphic Report. 

6 The members of the Government who really determined tele- 
phone policies conveyed their instructions to the Commission orally, 
carefully refraining from committing themselves to documentary 
evidence which might be brought against them. 

7 Stenographic Report, vol. i, pp. 100-101. 



4 o GOVERNMENT TELEPHONES 

contract for these poles could be placed with certain 
clients of his who were then involved in financial dif- 
ficulties and the payment for the poles would relieve 
the pressure upon them. 8 " Recommendations " 
even as to the employment of individuals were made 
by Cabinet Ministers ; and although the Commission 
was under no statutory obligation to act upon these 
" recommendations," nevertheless it was well under- 
stood that the smooth working of the Commission- 
ers' relations with the Government depended upon 
the adoption of the " recommendations," which were 
always orally communicated. Moreover, it will be 
recalled that the prescribed functions of the Com- 
mission did not include the purchasing of supplies, 
the control over such purchases being specifically re- 
served to the Government; that is, while the Com- 
mission prepared requisitions, the Government de- 
cided to whom contracts should be given. These 
contracts were awarded for political effect and were 
made instruments by means of which the party po- 
litical organization was strengthened and party funds 
were collected from the contractors. This system, 
of course, is one which is practised by both political 
parties, though party interest prevents its sordid de- 

8 Cf. p. 103, infra. An advertisement calling for tenders for 25,- 
000 poles appeared in the newspapers of November 5, 1908. On the 
excessive number of poles purchased by the Commission in conse- 
quence of political pressure, see e. g. Stenographic Report, vol. iii, 
p. 143 et seq. 



UNDER FIRST COMMISSION 41 

tails from coming to the knowledge of the public ex- 
cept in rare and flagrant cases. 

In the realm of finance, too, the Government 
failed to keep its promises of commercial man- 
agement. From the beginning of the Government 
telephone service, the Commission was required to 
pay all its " receipts from earnings n into the Provin- 
cial Treasury and to draw upon the Treasury for the 
funds to meet all expenses ; 9 and thus there was 
neither created nor maintained any reserve against 
depreciation or, in fact, any reserve of any kind what- 
ever. 10 The natural result of such political account- 
ing methods was that in each of the first three years 
of Government operation the books of the system 
showed an " excess of revenue over expenditure " 
which was erroneously described as a " surplus " ; 
while political credit was taken for these fictitious 
profits and the success of Government operation of 
telephones in Manitoba was widely trumpeted. 
Furthermore, it must again be noted that the Gov- 
ernment continued such unsound methods of ac- 
counting in direct opposition to the advice of the Tel- 
ephone Commission. The Commission pointed out 
that an annual depreciation charge of at least 6 per 
cent, upon plant cost ought to be made, but still the 
Commission was not permitted by the Government 

9 Order-in-Council No. 12545. 

10 Stenographic Report, vol. i, pp. 28-29. 



42 GOVERNMENT TELEPHONES 

to set aside any reserve, even to meet reconstruction 
expenses. 11 

A SECTIONAL INCREASE IN RATES; TELEPHONE 

MANAGEMENT DOMINATED BY POLITICAL 

INFLUENCE 

In spite of the Government's glib promises to the 
effect that the Bell rates were to be " cut in two," in- 
stead of a reduction in rates, the immediate result of 
Government ownership was a substantial, though sec- 
tional, increase. Under the Bell Company, the tele- 
phones of physicians, dentists and nurses had been 
granted a reduced rate; on February 20, 1908, the 
Commission issued a circular announcing that there- 
after such telephones would be charged for at the 
regular rate for business service, representing an in- 
crease of 25 per cent. 12 Although this increase can- 
not, in itself, be especially condemned, nevertheless 
the Commission's action caused much controversy 
because it was such a flagrant violation of the Gov- 
ernment's promises in regard to rates. Almost from 
the beginning the Telephone Commission found 
itself the target of hostile criticism, for although it 
had not been in the least responsible for the prom- 
ises made by the Government, yet it was in the posi- 
tion of having to bear the responsibility for any fail- 
ure to fulfill these promises. 

11 Stenographic Report, vol. i, p. 31 et seq. Cf. also p. 55, note 
42, infra. 

12 A copy of this circular letter is given in the Winnipeg news- 
papers of February 22, 1908. 



UNDER FIRST COMMISSION 43 

The immediate action of the Government in rela- 
tion to their pledges having thus been briefly indi- 
cated, with these pledges in mind we are now pre- 
pared to follow the history of the enterprise. So 
far as practicable, this history will be given chron- 
ologically. 

In the first place, notwithstanding the activity of 
the Government in construction work, they did not 
move fast enough to suit the Opposition. For in- 
stance, about three months after the purchase, the 
Opposition paper in Winnipeg denounced the Gov- 
ernment for failing to provide at least 1,000 miles 
of additional long distance lines. 13 The political ef- 
fect of such attacks was not lost upon the Govern- 
ment, who saw themselves forced to adopt a policy 
of the most feverish energy in construction, — an il- 
lustration of the fact that, after all, both political 
parties have been implicated in the mismanagement 
of the system. As has already been indicated, the 
speed at which construction was forced in the years 
1908 to 191 1 was very costly; but the Commission 
was told to go on, that the Province could sustain 
the financial burdens involved. The Commission 
was obliged to erect unprofitable and unnecessary 
rural lines, to convert toll offices into exchanges be- 
fore the amount of business warranted the change, 
to give night service in small exchanges where day 
service would have sufficed and to give free service 

13 The Manitoba Free Press, Winnipeg, April n, 1908. 



44 GOVERNMENT TELEPHONES 

between certain exchanges, 14 — all of which was done 
at the instance of the Government in order to placate 
political opponents or to gratify supporters, and also 
in order. to increase the patronage of the Govern- 
ment and to promote the illusion that the system was 
prospering. Moreover, attention should again be 
called to the fact that it was impossible to expand 
the internal organization to keep pace with the ex- 
pansion in plant. Also, the scarcity of labor com- 
pelled the Commission to keep an excessive number 
of men on the permanent pay-rolls, while, as a mat- 
ter of actual practice, the Commission was unable to 
select its employees. 15 Men were forced upon fore- 
men by members of the Provincial Legislature; Cab- 
inet Ministers made " recommendations " over the 
telephone, while at the same time solemnly assuring 
the public that the Commission was hot being inter- 
fered with and that the business was being conducted 
on a commercial footing. Indeed, hangers-on of 
both parties were always on the look-out for political 
crumbs; in the words of one of the Commissioners it 
is found that " the whole running of the system has 
been permeated with politics." 16 Finally, while the 
Government was playing fast and loose with the 
real interests of the Province, the people were 

14 Memorandum by the Commissioner Auditor (typewritten) pre- 
pared early in 1912. 
is Ibid. 
16 Ibid. 



UNDER FIRST COMMISSION 45 

scarcely less culpable. They appeared to be de- 
moralized by the fact that the telephone was a Gov- 
ernment undertaking and exploited the telephone ad- 
ministration in every way. 17 

After the Minister of Telephones and Telegraphs 
(i. e., the Government) had awarded most of the 
contracts for the first season of construction, 18 a 
change in the form of administration took place. 
[The existence of a Ministerial Department of Tele- 
phones and Telegraphs in addition to the Telephone 
Commission had led to division of control and re- 
sponsibility as well as to duplication of labor. Six 
months after the transfer of the Bell system to the 
Government, this dual control became not only ob- 
viously absurd but also positively embarrassing to 
the Government, for both the telephone users and 
the general public regarded the Telephone Depart- 
ment, and not the Telephone Commission, as the 
real authority and therefore complaints and demands 

17 A side-issue of the Government's construction policy should be 
mentioned here. Even after the Bell system in Manitoba had been 
acquired, the Government did not entirely abandon its cherished 
attitude toward municipal ownership of local exchanges, but contin- 
ued to encourage municipalities to install local systems by offering to 
provide plans, to superintend construction, to supply the necessary 
materials at cost, and to guarantee the debentures issued by the mu- 
nicipalities to secure the funds necessary for the establishment of such 
systems. This policy was so far from being successful, however, 
that not only were few new municipal telephone systems established, 
but some of those which were in existence at the time of the acquisi- 
tion of the Bell system were subsequently sold to the Government. 

18 Cf. the Manitoba Free Press, Winnipeg, June 3, 1908; The 
Winnipeg Telegram, June 4, 1908. 



46 GOVERNMENT TELEPHONES 

for exceptional consideration were made either di- 
rectly to the Telephone Department or, more fre- 
quently, through a member of the Legislature to the 
Minister. The Government thus saw themselves in 
a position of responsibility, and this responsibility 
having soon become* intolerably embarrassing, it be- 
came necessary to take further action to throw the 
nominal responsibility upon the shoulders of the 
Commission. Therefore, in June, 1908, the Min- 
ister of Telephones dispensed with the 1 technical staff 
which he had employed in the Telephone Depart- 
ment at a cost of $10,000 a year, and the power to 
purchase supplies w T as transferred to the Commis- 
sion, the Minister retaining, however, the power of 
" supervision." 19 Thus this administrative change 
was essentially a change in form without a change in 
substance, for so long as the Minister retained 
" supervisory " powers the Commission could not be 
free from political influence. As a matter of fact, 
the chief result of this change in the form of admin- 
istration was to enable members of the Government 
to reply to inconvenient claims and complaints to the 
effect that the patronage had passed out of their 
hands into those of the Commission, while it still re- 
mained open to the Government to bring pressure to 
bear upon the Commission in order that political in- 
terests might be adequately served. 

19 The Manitoba Free Press, Winnipeg, June 13, 1908. Cf. Or- 
der-in-Council No. 13011. 



UNDER FIRST COMMISSION 47 

While the Telephone Commission was doing its 
best — - under pressure — to carry out the Govern- 
ment's policy in regard to the rapid extension of the 
telephone system (a policy dictated solely by politi- 
cal expediency), the Commission could not redeem 
the pledges in regard to the reduction of rates. In 
general the Bell rates continued to be retained 
throughout 1908; in certain cases (some of which 
have already been mentioned) they were materially 
increased. 20 The Opposition newspapers did not 
cease denouncing the members of the Government for 
having failed to live up to their promises; but the 
fault lay in having made the promises rather than in 
having failed to fulfill them. Had the Government 
met all the demands of the Opposition - — or, indeed, 
all those of the public — the telephone enterprise 
would speedily have been reduced to hopeless bank- 
ruptcy; even as it was, the credit of the Province had 
undoubtedly suffered. 21 The general situation cer- 
tainly justified the following summary made by an 
Opposition newspaper toward the close of the first 
summer of Government operation: " The carrying 
out of the Government's telephone policy has re- 
sulted in the people of Manitoba having had placed 
upon them an indebtedness of close upon $4,000,000. 
The interest on this indebtedness makes a heavy 
fixed annual charge. The service is no better than 

20 Cf. the Manitoba Free Press, Winnipeg, August 28, 1908. 

21 Cf. the Manitoba Free Press, Winnipeg, September 22, 1908. 



4 8 GOVERNMENT TELEPHONES 

was given by the Bell Telephone Co., whose share- 
holders now hold the Province's bonds and have to 
be paid their interest regularly. The rates are no 
lower than the Bell rates were, in some cases they 
are higher." 22 The accusations against the Gov- 
ernment, however, were disposed of in the most cav- 
alier manner; for example, one of the Cabinet Min- 
isters said quite cynically that " when they engaged 
in the battle with the Bell Telephone Company, it 
was necessary to make strong statements " 23 — 
which is tantamount to a frank avowal that the state- 
ments made by the members of the Government dur- 
ing the telephone agitation were made without re- 
gard to truth. 

SUBSTANTIAL PROFITS FROM THE FIRST YEARNS 
OPERATIONS ALLEGED BY THE GOVERNMENT 

In November 1908, when the Government tele- 
phones had been in operation for almost a year, a 
rumour was circulated to the effect that rates would 
be " cut in half" on January 1, 1909, this rumour 
being based upon a statement of a Cabinet Minister 
that the Telephone Department, for its first year, 
would show a profit of $200,ooo. 24 In December 

22 The Manitoba Free Press, Winnipeg, September 22, 1908. 

23 The Manitoba Free Press, Winnipeg, November 16, 1908. 

24 Cf. The Minneapolis (Minn.) Journal, November 14, 1908; 
The Detroit News Tribune, November 15, 1908; the New York 
Tribune, November 16, 1908. 



UNDER FIRST COMMISSION 49 

1908, Winnipeg and other papers contained re- 
peated announcements " on reliable authority " that 
the first year of Government telephone operation had 
been so successful that there would be a profit of 
$200, 000, 25 $225, 000, 26 or $25o,ooo. 27 Again, in 
January 1909, a Cabinet Minister took credit to the 
Government for the alleged profit and announced 
that " with such a showing there is no doubt that we 
will reduce rates." 28 That these press statements 
were inspired by the Government is shown by the 
fact that similar claims were made at about the same 
time by members of the Government in election 
speeches; and such statements were employed widely 
to induce a belief in the success of the Manitoba tel- 
ephone venture, and in the absence of proof to the 
contrary they were accepted in good faith. 

The session of the Manitoba Legislature at which 
the first report of the telephone service was pre- 
sented, began on February 4, 1909. The extent to 
which the telephone was regarded as a political issue 
is illustrated in the statement of the Government pro- 
gram which opened the session, for of the four par- 
agraphs comprising this statement, the telephone 
question occupied two. In one paragraph it was an- 
nounced that " a most substantial surplus has been 

25 Cf. Telephony, Chicago, December 19, 1908. 

26 Cf. The Tribune, Winnipeg, December 25, 1908. 

27 Cf. The Tribune, Winnipeg, February 4, 1909. 

28 The Manitoba Free Press, Winnipeg, January 5, 1909. 



5 o GOVERNMENT TELEPHONES 

obtained." 29 A few days later a discussion of the 
telephone question was introduced by an Oppositon 
member and a vigorous debate ensued, in the course 
of which one speaker said that " he suggested that 
members should tell the Government what was 
wanted in the constituencies. Since he had been a 
member ... he had always laid his case before the 
Minister of Public Works and had benefited by so 
doing. Every member should do the same, not only 
to the Minister of Public Works, but to every de- 
partment." 30 In other words, the exertion of politi- 
cal pressure at any point in the Government would 
produce the desired results ! 

When a telephone profit was announced by the 
Government, of course its often repeated promise 
that service would be provided " at cost n 31 was re- 
called, and the Opposition newspapers began to de- 
mand " rebate cheques for telephony users." 32 But 
although members of the Government, in pre-elec- 
tion statements, had insisted that a profit of $200,000 
had been produced the first year, the Public Accounts 
of the Province, when they were placed before the 
Legislature on February 11, 1909, failed to confirm 
these pre-election announcements, but showed a 

29 Journals of the Legislative Assembly of Manitoba, Session IQOQ, 
pp. 1-2. Cf. The Winnipeg Telegram, February 4, 1909. 

30 The Winnipeg Telegram, February 10, 1909. 

31 Cf. p. 18, supra. 

32 Cf. the Manitoba Free Press, Winnipeg, February 11, 1909, and 
February 12, 1909. 



UNDER FIRST COMMISSION 51 

" balance ,J from the year's telephone operation of 
only $168,915, as follows: 33 

Receipts: Telephone rentals ... $656,486.74 

Disbursements : 

Paid to Telephone Commis- 
sion . .. $300,000.00 

Expenses of Telephone De- 
partment i9,3i9-33 

Interest : 

Debentures — Series H. . 32,020.00 

Debentures — Series I... 136,231.67 $487,571.00 

Balance $168,915.74 

On February 15th, the Provincial Treasurer, in 
explaining his budget for the year 1909, said that the 
Government confidently believed that its telephone 
policy was sound and that it was giving " a serv- 
ice that was equally as cheap as similar services are 
being given elsewhere." No reference was made to 
the fact that this opinion as to the cheapness of the 
service was not the view which had been presented 
by members of the Government in regard to the rates 
prior to the acquisition of the system, — rates which 
had not been reduced by the Government. The 
Provincial Treasurer also declared that since only 
a small proportion of the population of Manitoba 
were telephone users, whereas the whole population 

33 Sessional Papers. Legislative Assembly of Manitoba. Session 
1909, pp. in, 355-357. 



52 GOVERNMENT TELEPHONES 

had become responsible for the debt on the telephone 
account, the excess of revenue over expenditure 
should go into the general exchequer of the Prov- 
ince. 34 He failed to observe, though, that this posi- 
tion was quite inconsistent with the Government's 
promise to provide telephones " at cost." 35 

The Opposition press was not slow in detecting 
the peculiar system of accounting, or rather the lack 
of proper accounting, as a result of which this ap- 
parent surplus of $168,915 made its appearance. 
For example, it was shown that the current expenses 
of the Commission during the year ($300,000) 
amounted to only 46 per cent, of the gross receipts, 
whereas under the Bell Company during the ten 
years 1 895-1904 the annual percentage of operating 
and maintenance expenses to gross receipts had aver- 
aged 71 per cent., so that it appeared that the Gov- 
ernment had really charged practically all mainte- 
nance expenses to plant account. The Manitoba 
Free Press pointed out that if all maintenance ex- 
penses had been charged against revenue and if 
combined operating and maintenance expenses had 
consumed only 70 per cent, of gross receipts, then 
this "surplus" of $168,915 would have almost 
disappeared; and the Free Press naturally con- 
cluded that if the Government, to " save its face," 
should reduce the rates, it would " involve the Prov- 

34 The Winnipeg Telegram, February 16, 1909. 

35 Cf. p. 18, supra. 



UNDER FIRST COMMISSION 53 

ince in heavy financial loss." 36 However, even the 
re-statement of the accounts made by the Free Press 
included no charge for accrued depreciation. 

The accounts of the Telephone Department were 
issued a few days after the Public Accounts had been 
presented to the Legislature. 37 The component 
items of these accounts did not agree with those given 
in the Public Accounts, since — for example — - the 
gross revenue included a large amount of unearned 
rentals; but the accounts disclosed no materially dif- 
ferent state of affairs, though by making allowances 
for unearned rentals and for accrued depreciation 
the Opposition press was able to argue that the real 
result of the year's operations was a deficit of about 
$30,ooo. 38 

REAL DEFICIT IN 1908 CONCEALED BY UNSOUND 
ACCOUNTING METHODS 

Although it is true that the telephone accounts 
for 1908 as given both by the Provincial Treasurer 
and by the Telephone Department were character- 
ized by a total lack of the elementary principles of 
commercial accounting, the revisions of the accounts 
made by the Opposition were also unscientific and 
cannot be accepted as accurate representations of the 
true situation. In order to arrive at any approx- 

36 The Manitoba Free Press, Winnipeg, February 16, 1909. 

37 The Winnipeg Telegram, February 23, 1909. 

38 The Manitoba Free Press, Winnipeg, February 24, 1909. 



54 GOVERNMENT TELEPHONES 

imation of the real financial results of Government 
telephone operation, it will be necessary to recast the 
accounts of the system so that they will accord with 
accounting methods which are recognized to be 
sound. From the stand-point of sound accounting 
practice, the accounting methods employed by the 
Government were obviously deficient in two re- 
spects : 

(a) A considerable portion of the maintenance 
expenses were charged to capital (instead of being 
charged against revenue) ; 

(b) No reserve was set aside to meet the recon- 
struction expenses arising from the inevitable con- 
stant depreciation of the plant. 

In order to eliminate the effects of these deficien- 
cies upon the published accounts, the following pro- 
cedure has been adopted here : 

(a) The amount of maintenance expenses which 
were improperly charged to capital in the telephone 
accounts was adjudged, according to an appraisal of 
the plant made in 1915, 39 to reach in the aggregate to 
$336,232, all of which sum was found to have been 
charged to capital during the first three years of 
Government operation: 1908, 1909 and 1910. Al- 
though it is impossible to apportion this sum among 
the three years accurately, yet it is not unreasonable 
to assume that the greater part of it — say 80 per 
cent. — was charged to capital during 1908 and 

39 Cf. pp. 1 51-152, infra. 



UNDER FIRST COMMISSION 55 

1909. In recasting the accounts in these pages, 
therefore, 40 per cent, has been allocated to the 
year 1908, 40 per cent, to 1909, and 20 per cent, 
to 1 9 10; that is to say, sums representing these per- 
centages of $336,232 have been deducted from the 
plant account and have been added to the current 
expenses for " Maintenance " in the respective years, 
(b) As has already been observed, 40 the Tele- 
phone Commission had pointed out that in order to 
provide an adequate reserve to meet the reconstruc- 
tion expenses arising from constantly accruing de- 
preciation, a sum equivalent to at least 6 per cent, of 
plant cost should be set aside from current revenue 
each year. In view of the fact that the climatic con- 
ditions in Manitoba are such as to cause abnormally 
rapid deterioration in out-door plant, 41 it is certain 
that no less a sum would have been sufficient to pro- 
vide an adequate reserve ; and in recommending that 
such a sum be set aside, the Telephone Commission- 
ers — as they themselves did not fail to point out — 
were understating rather than overstating the amount 
of depreciation reserve which the best telephone en- 
gineering experience had found to be necessary. 42 

40 Cf. p. 41, supra. 

41 Reference to the effect of the " extraordinary weather condi- 
tions " in Manitoba upon the life of the plant may be found in the 
Seventh Annual Report of the Manitoba Government Telephones 
for the Fiscal Year ending November 30th, 1914, p. 14. Cf. p. 140, 
infra. 

42 For example, in a letter to the Minister of Public Works, dated 
April 19, 191 1, the Chairman of the Telephone Commission said that 
the telephone plant " should have an annual reserve set aside to 



5 6 GOVERNMENT TELEPHONES 

But the Government refused to allow the Commis- 
sion to set aside any depreciation reserve to meet re- 
construction expenditure, and thus forced the Com- 
mission to adopt the unsound and hand-to-mouth 
policy of charging reconstruction expenses each year 
directly against current revenue; as a result, during 
the first four years of Government operation recon- 
struction expenses were included with maintenance 
expenses in the telephone accounts. Therefore, in 
recasting the accounts, it is necessary to include with 
each year's current expenses an amount equivalent to 
6 per cent, of the cost of the plant; 43 and on the 
other hand, it is necessary to exclude from each 
year's current expenses the expenses of the recon- 
struction actually effected during the year, as expenses 
for reconstruction should properly be met from de- 
preciation reserve. In regard to the latter process 
— the exclusion of actual reconstruction expenses 
from current expenses — unfortunately during each 
of the first four years of Government operation 
(1908-1911 inclusive) it is impossible to determine 

provide for its replacement of at least 6%, assuming it is to earn in- 
terest. All authorities agree that the average life of a well built 
telephone plant is twelve years, or an annual depreciation at the 
rate of 8%." 

43 The cost of the plant, as used in this work, represents each year 
the cost at the end of the preceding year, as derived from the an- 
nual accounts of the Government telephone system given in the 
Sessional Papers. All intangible items and all current expenses im- 
properly charged to capital, as shown by an appraisal of the plant 
made in 191 5, are excluded. Cf. pp. 1 51-152, infra. 



UNDER FIRST COMMISSION 57 

from the published accounts the exact amount of the 
actual reconstruction expenses, owing to the fact 
(mentioned above) that the expenditure for mainten- 
ance and the expenditure for reconstruction were 
combined into one item of " Maintenance " each 
year and were not shown separately. However, by 
assuming each year that the portion of these com- 
bined expenditures (including the maintenance ex- 
penses deducted from plant account as explained 
above) which w r as in excess of a reasonable allow- 
ance for maintenance expenditure represented recon- 
struction expenditure, an approximation of actual 
reconstruction expenses may be obtained. Accord- 
ingly, in recasting the accounts for the first four 
years, maintenance has been assumed to have re- 
quired each year an amount which bore the same re- 
lation to the cost of the plant as did the amount of 
the maintenance expenses in those years in which 
maintenance expenditure is shown as a separate item 
in the accounts; and the balance of the combined 
maintenance and reconstruction expenditures in these 
four years has therefore been excluded from current 
expenses as representing reconstruction expenditure. 
By eliminating the deficiencies in the accounting 
methods employed by the Government and by recast- 
ing the published accounts in the manner described, 
the financial result of the first year of Government 
operation appears as follows: 



5 8 GOVERNMENT TELEPHONES 

Gross Revenue $656,487 

Expenses : 

Operation $256,129* 

Maintenance 94,162 

Depreciation 149,860 

Total Expenses 500,151 

Net Earnings 156,336 

Interest 168,252 

Deficit $11,916 

* This figure is necessarily estimated, as operation expenses — in 
1908 — are not shown separately in the published accounts. Cf. p. 
51, supra. The figure bears the same relation to gross revenue, 
however, as does the average of the actual figures for operation ex- 
penses in 1909, 1910, and 191 1. Allowance has been made for 
operation expenses incurred in 1908, but not included in the tele- 
phone accounts until the next year. 

This revision of the accounts eliminates the effect 
of the two known deficiencies in the accounting 
practice which the Government forced upon the 
Telephone Commission; but it must not be supposed 
that these were the only deficiencies in the telephone 
accounts. An inspection of the books would doubt- 
less reveal departures from sound accounting prin- 
ciples in a considerable number of other cases, — 
some serious, some petty. It should be observed, 
however, that the effect of all deficiencies in the ac- 
counts is to increase the book profits of the system: 
the tendency of Government bookkeeping is to in- 
clude with revenue items which should properly be 
excluded (such as revenue received during the year, 
but not earned during the year) and to exclude from 
expenses items which should properly be included 



UNDER FIRST COMMISSION 59 

(such as the value of work done free of charge by 
other Government departments). Thus, as regards 
the preceding revision of the accounts (and the sub- 
sequent similar revisions), failure to make allowance 
for the effect of unknown deficiencies in the accounts 
merely decreases the losses shown and therefore 
makes the results conservative. Moreover, the con- 
servatism of the results as stated here is enhanced 
by the fact that in such revisions of the accounts no 
deduction from revenue is made to provide for the 
gradual writing off of intangible capital, although it 
cannot be open to question that annual provision for 
writing off intangible capital should have been made; 
indeed, the necessity for the gradual extinction of 
intangible capital was later officially recognized. 44 
It is clear from the above revision of the accounts, 
then, that all profits which had formerly been earned 
by the Bell Telephone Company — over and above a 
sum equal to the interest charges paid by the Gov- 
ernment on their telephone capital — were entirely 
dissipated during the very first year of Government 
operation. Even if less provision against deprecia- 
tion had been made, this real result would not have 
been materially affected — and this real result was 
produced under even higher rates than the Bell Com- 
pany had charged ! 45 

44 Cf. p. 154, infra. 

45 Cf. pp. 42 and 47, supra. Moreover, the Government system 
is exempt from practically all taxation, whereas the Bell Company 
paid almost $io,ooo a year in taxes in Winnipeg alone (The Mani- 



60 GOVERNMENT TELEPHONES 

On March 9, 1909, the Report of the Public Ac- 
counts Committee for the year 1908 was brought 
before the Legislature. The Committee had made 
a somewhat detailed inquiry into the telephone ac- 
counts and had confirmed such significant facts as 
that the telephone revenue for the year had included 
unearned revenue and that many current expenses 
had been charged to capital. Nevertheless, the 
Committee's report was a purely formal generaliza- 
tion containing no reference to details. 46 But the 
Opposition was unwilling to allow the occasion to 
attack the Government's accounts to go by default 
and an Opposition member of the Legislature there- 
fore moved the adoption of an amended report 
which stated the case against the accounts accurately. 
In this amendment attention was called to the in- 
clusion of unearned revenue with earned revenue; 
to the existence of large bank overdrafts incurred 
for telephone expenditures; and to the absence of 
any provision against depreciation. 47 Needless to 
say, however, this amended report was rejected and 
the original colorless report adopted. 4S Neverthe- 
less, the proceedings in connection with this report 

tola Free Press, Winnipeg, December 13, 1908, and December 24, 
1908). This exemption from taxation is a factor which must be 
borne in mind throughout the consideration of the financial results 
of the Government telephones. 

46 Journals of the Legislative Assembly of Manitoba, Session iqoq, 
pp. 154-5. 

47 Ibid., pp. 155-8. 

48 Ibid., p. 158. 



UNDER FIRST COMMISSION 61 

of the Public Accounts Committee show that the Op- 
position, for political ends, early adopted every 
means in their power of calling the Government to 
account for deliberately misleading the people of the 
Province into the belief that the administration of 
the telephone system had been financially successful; 
and although the evidence as to telephones taken on 
oath by the Public Accounts Committee is not printed, 
it has already been seen that enough material of an 
indisputable character remains to prove that the Gov- 
ernment administration of the telephones in Mani- 
toba exhibited from the beginning a complete disre- 
gard of sound principles of finance. 

A MODERATE RATE REDUCTION EFFECTED BY THE 
GOVERNMENT FOR POLITICAL PURPOSES 

On February 25, 1909, a few days after the pub- 
lication of the telephone accounts, the Minister of 
Public Works, speaking before the Legislature, very 
justly complimented the Telephone Commissioners 
upon their management of the system, for there can 
be no doubt that they made the best of highly un- 
favorable conditions and that, so far as they were 
concerned, the system was generally managed effi- 
ciently and economically: the deficiencies in manage- 
ment lay altogether outside of the sphere of the Com- 
mission. In the same speech the Minister stated 
that the real " surplus " for the first year of opera- 
tion was $232,501, and continued: " In view of the 



62 GOVERNMENT TELEPHONES 

magnificent financial results as shown by the financial 
statement, it becomes my pleasant duty to announce 
the conclusions reached by the government in respect 
to a reduction of rates." 49 He did not say that the 
Government had been advised by the Telephone 
Commission that the telephone accounts showed that 
reductions could be made; he intimated clearly that 
the reduction of rates was due to the policy of the 
Government. 

The Minister of Public Works then announced the 
new rate schedule, which applied to exchange rates 
only, long distance rates remaining unchanged. The 
chief provisions of the new schedule were as fol- 
lows: 

a) The flat (i.e., unlimited service) rate for in- 

dividual line, business service in the cities 
($50 per year in Winnipeg) was left un- 
changed. 

b) The other flat rates were reduced as follows: 
Winnipeg. 

Individual line, residence: existing annual 
charge of $30 reduced to $25. 

2 Party line, residence: existing annual 
charge of $24 reduced to $18. 
Brandon and Portage la Prairie. 

Individual line, residence: existing annual 
charge of $25 reduced to $20. 

49 The Winnipeg Telegram, February 26, 1909. 



UNDER FIRST COMMISSION 63 

2 Party line, residence : existing annual 
charge of $21 reduced to $15. 
Small Towns. 

Individual line, business: existing annual 
charge of $24 reduced to $20. 

Individual line, residence : existing annual 
charge of $18 reduced to $15. 
Farmers' Lines. 

Existing annual charge of $24 reduced to 
$20. 

Existing annual charge of $30 reduced to 
$25. 
c) A 2 party line, business, unlimited service rate 
was introduced in the cities; and a meas- 
ured service rate for individual line busi- 
ness and residence service was introduced 
in the cities as an alternative to the flat 
rates for such service. 

While the introduction of the measured service 
rates was an innovation in Manitoba, nevertheless, 
since the flat rates were retained and the measured 
rates were merely optional, the innovation was prac- 
tically unheeded and caused no comment. The new 
rates were to go into force on April 1, 1909. 

The new schedule was in effect a political scale 
devised by the Government for the purpose of pla- 
cating the politically most influential classes. There 
can be no doubt as to its source, in view of the fol- 



64 GOVERNMENT TELEPHONES 

lowing extract from the evidence of the Chairman 
of the Telephone Commission before the Public Ac- 
counts Committee in 19 10. The Chairman, when 
questioned by a member of the Committee in regard 
to the reduction of the farmers' rate from $24 to 
$20, replied as follows: 

" Q. — Was the reduction from $24 to $20 made 
by the commission? 

" A. — No, we put it in effect, but it was a reduc- 
tion made by the Government. 

" Q. — Were you consulted as to the reduction 
being made? 

"A.— -Yes, I was consulted. 

" Q. — And did you advise that it should be made ? 

11 A. — I cannot say that I did." 
And in another place : 

" Q. — And you are sure that the suggestion of 
the $20 rate did not come from you? 

11 A.— I am sure of that." 50 
No comment is necessary to illuminate this testi- 
mony; 51 it is also self-evident that the reductions 

50 Sessional Papers. Legislative Assembly of Manitoba. Session 
iqio. Appendix A. E<vide?ice Taken before the Public Accounts 
Committee during the Session of iqio, p. 703. 

51 This evidence, however, is further proof of the situation in re- 
gard to the Telephone Commission. There was at the head of the 
Commission an absolutely honest and upright man who was doing 
the best he could for the Province, a man technically trained who 
knew that more or less disastrous failure was inevitable unless a 
change of policy occurred. On the other side there was the Govern- 
ment, merely desirous of retaining its power and utilizing the 
telephone system for the purpose of securing party advantages, how- 
ever temporary and at whatever cost to the Province. 



UNDER FIRST COMMISSION 6s 

provided by the new schedule were insignificant in 
comparison with the pledge that rates would be 
" cut in two." 

Although the results of the first year's operation 
of the Government telephone system gave little sat- 
isfaction in Manitoba, notwithstanding the " sur- 
plus " resulting from the Government's manipula- 
tion of the accounts and notwithstanding the reduc- 
tion in rates, some of the politicians in the Dominion 
Parliament at Ottawa attempted to make political 
capital out of the alleged success of the Manitoba 
Telephones. In the Dominion Parliament on 
March i, 1909, one member moved the adoption of 
a resolution that " it is the immediate duty of the 
government to initiate and carry out such measures 
as will . . . secure to the people of Canada, other 
than the people of Saskatchewan, Alberta and Mani- 
toba, a rate of service at least as moderate as . . . 
prevails in countries where a national telephone serv- 
ice is maintained." 52 In support of his motion the 
member referred especially to the case of Manitoba, 
and spoke of the Government Telephones there as 
having yielded "a surplus of $380,000 for the 
eleven months and a half in which they have been 
operating." 53 But on being questioned on this 
point, the proposer of the resolution admitted that 

52 Official Report of the Debates of the House of Commons of the 
Dominion of Canada. First Session — Eleventh Parliament, Vol. 
LXXXIX. Column 1761. 

53 Ibid., Column 1769. 



66 GOVERNMENT TELEPHONES 

he had not analyzed this surplus, while another 
member of Parliament showed that the actual situa- 
tion in Manitoba was well understood by pointing 
out that the Government service had produced an 
actual deficit and continuing: " I am aware that the 
telephone system is operated by the commission. 
But I am also aware that, so far as policy is con- 
cerned, the commission is under the control of the 
government, and the revenues received by the com- 
mission are paid over to the provincial treasury. 
The rates are certainly controlled by the govern- 
ment, and not by the commission " since " there was 
no justification for that reduction, there were no 
business reasons for it." 54 

So much for the events connected with the first 
year of the Manitoba Government telephones. 

LABOR DIFFICULTIES 

The second year of Government operation (1909) 
had scarcely begun before the Telephone Commis- 
sion encountered some labor difficulties. A desire 
for economy, as well as the necessity for speed to 
meet the conditions imposed by the Government in 
the reduction of the rates for rural telephones and 
in the policy of rapid construction, induced the Tele- 
phone Commission — in April, 1909 — to increase 
the working day of its line employes from nine to 
ten hours during the summer season. Although it 

54 Ibid., Column 1780 et seq. 



UNDER FIRST COMMISSION 67 

had been the accepted practice of the Bell Telephone 
Company to have a ten-hour day during the summer 
season, those workmen who were paid weekly or 
monthly wages — about 60% of the total number 
employed — immediately resented the increase when 
it was adopted by the Commission. The Trades and 
Labor Council of Winnipeg denounced the Govern- 
ment. " Such action," one of the members said, 
11 would be borne in mind in the next election. " 55 
Since, however, the Government were being kept in 
power by the vote of the farmer and not by the vote 
of the urban artisan, the threat carried no weight. 
Still, the fact that an administrative change led to 
a political attack illustrates one of the difficulties 
encountered by public authorities which engage in 
industrial enterprises. 56 It is also worthy of note 
that in November, 1909, as a protest against the 
discipline enforced by the Commission, the exchange 
operators in Winnipeg threatened to strike. 57 

On September 1, 1909, the Telephone Commis- 
sion effected a reorganization of the administration 
of the system, introducing what is known as " func- 
tional " organization. The entire business was di- 

55 The Manitoba Free Press, Winnipeg, April 16, 1909. 

5(5 That continued employment in the telephone service depended 
upon political considerations is evident from the fact that, upon his 
nomination as the Opposition candidate for Killarney (Manitoba) 
at the next election, the long distance agent of the Government tele- 
phones at Ninga was dismissed. The Manitoba Free Press, Winni- 
peg, July 7, 1909. 

67 Cf. the Manitoba Free Press, Winnipeg, November 6, 1909. 



68 GOVERNMENT TELEPHONES 

vided into three departments, viz., commercial, 
traffic and plant. The only territorial distinction 
was between Winnipeg and the rest of the Province. 
At the head of each department there was placed a 
superintendent, reporting to the Commission. In 
speaking of the change, Mr. W. H. Hayes, one 
of the Telephone Commissioners, said: " All tele- 
phone companies are gradually working into this 
new form of organization; it has proved to be far 
superior to the old method in facilitating the han- 
dling of the business. It arranges for a more de- 
tailed supervision of every locality on the system." 58 
In view of the generally recognized efficiency of the 
" functional " type of organization, its early intro- 
duction reflects great credit upon the Telephone 
Commission. 

DEFICIT IN 1909 CONCEALED BY THE ACCOUNTING 
METHODS PRESCRIBED BY THE GOVERNMENT 

As a result of the deficiencies in the accounting 
methods prescribed by the Government, the accounts 
of the telephone system for 1909, printed in the 
brief annual report of the Telephone Commission- 
ers, 59 gave no indication of the real financial out- 
come of the service during the year. As in 1908, 
maintenance expenses were charged to capital dur- 

58 The Bulletin, Winnipeg, August 21, 1909. 

59 Report of the Commissioners of Government Telephones for the 
year iqoq. Sessional paper No. 20. Sessional Papers. Legislative 
Assembly of Manitoba. Session JQio, pp. 624-627. 



UNDER FIRST COMMISSION 69 

ing the year and no reserve against depreciation y/as 
set aside; moreover, the Commissioners were not 
able to include in the accounts the interest paid dur- 
ing the year upon the telephone capital, the payment 
of such interest charges having been specifically re- 
served to the Provincial Treasurer. 60 According to 
the accounts in the report of the Telephone Com- 
missioners, there was an " excess of revenue over 
expenditure " for the year of $271,797; but when 
the effect of the known deficiencies in accounting 
methods is eliminated in accordance with the pro- 
cedure already described, 61 and when the interest 
upon the telephone capital 62 has been deducted, the 
results of the year's operations appear as follows: 

Gross Revenue $757>i43 

Expenses : 

Operation $309,088 

Maintenance 107,002* 

Depreciation 170,294! 

Total Expenses 586,384 

Net Earnings ._.. 170,759 

Interest 186,352 s8 

Deficit $15,593 

*This figure bears the same relation to plant cost as do main- 
tenance expenses in those years in which maintenance expenditure 
is shown as a separate item in the accounts. 

t Equivalent to 6% of plant cost at the end of the preceding year. 

60 Cf. p. 72, infra. 

61 Cf. pp. 54-57, supra. 

62 Until 1913 the annual interest charges upon telephone capital 
are shown only in the Public Accounts (i.e. the annual reports of the 
Provincial Treasurer) in the Sessional Papers. 

63 Sessional Papers. Legislative Assembly of Manitoba. Session 
igio } p, 52. 



7 o GOVERNMENT TELEPHONES 

In other words, the Government's accounting 
methods concealed a real deficit which, although it 
was equal to only 2 per cent, of the gross revenue, 
was nevertheless greater than the corresponding 
deficit in 1908; while the recurrence of a deficit was 
an ominous sign. Moreover, in thus creating real 
deficits, the Government was of course compromis- 
ing the public credit, a fact which an analysis of the 
Public Accounts of the Province will show. But 
even if it had been justifiable, as good public policy 
or as conducive to future advantages, to incur a loss 
in the telephone enterprise, it would have been only 
proper for the Government frankly to have stated 
such losses, instead of endeavoring to conceal them 
by means of lax and not entirely honest accounting 
methods. Unfortunately, however, the Manitoba 
Government from the beginning deliberately refused 
to look facts in the face; they preferred to deceive 
the public — and probably themselves — by creating 
the illusion that their venture into commercial busi- 
ness was a financial success. No illusion could have 
been greater. 

When examined before the Public Accounts Com- 
mittee in regard to the telephone accounts, the Chair- 
man of the Telephone Commission steadily refused 
to admit responsibility for the manner in which the 
accounts had been presented. He said that he was 
obliged to hand over to the Government all sums 
received by him, and to draw from the Government, 



UNDER FIRST COMMISSION 71 

or from the bank on the credit of the Government, 
all sums required by the Commission for the con- 
duct of its business. The following evidence of the 
Chairman before the Committee shows conclusively 
that the responsibility lay entirely with the Govern- 
ment: 

11 Q. — Has the Commission, within the years that 
they have been operating the telephone system, 
set apart any sum whatever for sinking fund pur- 
poses? 

" A. — We have nothing to do with that. 

" Q. — Has the Commission set anything apart 
for that? 

" A. — We pay every cent we get to the Provincial 
Treasurer and don't set apart anything. 

11 Q. — Then you can answer the question nega- 
tively, the Commission has set apart no sum what- 
ever for sinking fund purposes out of the earnings 
of these two years? 

" A. — No, we have not. 

" Q. — Has your opinion ever been asked upon 
that, whether it would not be a good business to do 
so? 

11 A.— No. 

" Q. — That is left entirely to the Government? 

"A. — Yes, that is left entirely to the Govern- 
ment. 

" Q. — Has the Commission set apart or recom- 
mended the setting apart of any sum for deprecia- 



72 GOVERNMENT TELEPHONES 

tion or a contingency account or anything of that 
kind? 

" A. — Well, the same answer applies to that 
question. . . . 

" Q. — What profit did the Government tele- 
phones earn in 1909, do you remember? 

" A. — We do not deal with the matter of inter; 
est on debentures at all; we remitted some $775,000 
to the Provincial Treasurer, and have received from 
him $485,000. 

u Q. — Then the Commission, as such, does not 
know what amounts were paid out for interest on 
debentures? 

"A.— No. 

" Q. — Then the Commission, as such, is unable 
to show by their statement at what profit or loss the 
business is being conducted? 

" A. — We can show the difference between the 
actual cost of operating and maintenance, and the 
amount of revenue. 

" Q. — And that is what you purport to show? 

" A. — That is all we can show." 64 

In regard to rates, another passage from the evi- 
dence of the Chairman of the Telephone Commis- 
sion, referring to the reduction in rates, is signifi- 
cant: 

64 Sessional Papers. Legislative Assembly of Manitoba. Session 
iqio. Appendix A. Evidence Taken before the Public Accounts 
Committee during the Session of 1910, pp. 706-7. 



UNDER FIRST COMMISSION 73 

" Q. — As far as the farmers' rates are concerned, 
I believe your view was that $20 (i.e., the reduced 
rate) was too near the cost without leaving any- 
thing for profit ? 

" A.— That is right. 

11 Q. — You never suggested that the farmer 
should get the benefit of anything that was coming 
in that direction? 

11 A. — Weil, the recommendation came from the 
Government to reduce the rates on the rural lines." 65 

And that the Government fully intended to take 
the credit with the farmer, is shown by the follow- 
ing passage : 

11 Question (by Dr. Armstrong, a member of the 
Committee). — Have any suggestions been made by 
the Commission to the Government to restore the 
price back to $24 a year for farmers' telephones? 

« A.— I would like to." 

The Attorney-General here interposed: " No 
doubt he would like to, and no doubt Dr. Arm- 
strong would like to charge the farmer more, but 
we do not propose to do so." 66 

These extracts from the evidence given on oath 
by the Chairman of the Commission in regard to 
the telephone accounts and rates are further proof 
of the pervasive character of the Government con- 

05 Ibid., p. 714. 

66 Sessional Papers. Legislative Assembly of Manitoba. Session 
iqio. Appendix A. Evidence Taken before the Public Accounts 
Committee during the Session of igio, p. 712. 



74 GOVERNMENT TELEPHONES 

trol of the Telephone Commission. They show 
that the Commission had in effect to do what it was 
told to do by the Government. It was forced 
against its desire to reduce the rates on rural tele- 
phones; the mere suggestion that these rates should 
be increased was met with a contemptuous negative 
by the Attorney-General. 

When the Report of this Public Accounts Com- 
mittee was presented to the Legislature on March 
16, 19 10, an Opposition member moved that the 
Report be referred back to the Committee for 
amendment in order to insert, among others, the 
following paragraphs : 67 

4 That the evidence of the Provincial Auditor 
shows that the trust accounts of the Province are 
not audited by him." (The funds which are appro- 
priated for telephone construction purposes consti- 
tute trust funds. Large sums had therefore been 
disbursed by the Government officials without ef- 
fective audit.) 

11 That, since the first day of May, 1909, the 
Telephone accounts have not been audited by the 
Provincial Auditor, the same having been removed 
from his jurisdiction by the action of the Executive. " 
(The result of this action of the Government was 
an inadequate audit which gave rise to some of the 
abuses which were revealed later.) 

67 Journals of the Legislative Assembly of Manitoba, Session 
iqio, p. 174- 



UNDER FIRST COMMISSION 75 

On a party vote these proposed amendments to 
the Report were rejected. 68 

CONSTRUCTION POLICY OF THE GOVERNMENT IN- 
ECONOMICAL AND MARKED BY POLITICAL ABUSES 

The year 19 10 was the third year of the opera- 
tion of the Government telephones and, in methods 
and results, it was not distinguished in any essential 
from its two predecessors. At the end of the year 
the system embraced 29,748 telephones, distributed 
as follows: 

Business telephones 11,181 

Residence telephones 1 1,537 

Rural telephones. . . 7,030 

Total 29,748 s9 

As the number of telephones at the time of the 
Government's acquisition of the system was I4,042, TO 
the number of telephones had been doubled in the 
three years of Government operation. In spite of 
the fact that this increase was secured at an exces- 
sive cost to the Province, and although there was no 
real economic demand for some of the extensions 
which had been effected, the growth of the service 

68 Journals of the Legislative Assembly of Manitoba, Session 1910, 
p. 175. 

^Report of the Commissioners of Manitoba Government Tele- 
phones for the year ending 31st of December, 1910. Sessional 
Paper No. 14. Sessional Papers. Legislative Assembly of Mani- 
toba. Session 1911, p. 582. 

70 Cf. p. 38, supra. 



76 GOVERNMENT TELEPHONES 

has certainly been the most unobjectionable feature 
of the history of the system under Government con- 
trol. However, as will be pointed out in detail 
later, 71 it must not be assumed that this growth 
was due to Government control, for no such assump- 
tion can have any basis in fact. Incidentally, it will 
be recalled that the number of telephones was doub- 
led during the last two years of Bell management 
and that the Bell Company had anticipated a much 
larger growth in the following years; indeed, the 
large amount of advance construction at the time 
of the acquisition of the Bell system was put for- 
ward by the Government as one explanation of the 
apparently high price paid for the plant. 72 

Moreover, the Manitoba Free Press reported an 
example of the political abuses which were rampant 
even in the matter of extensions. Although it is im- 
possible at this date to verify the incident which the 
Free Press relates, yet it seems so probable that it 
is given here : 

" [The people of Woodridge and the region sur- 
rounding that station . . . are suffering from the 
sort of hope deferred which maketh the heart 
sick, in the matter of securing telephone connec- 
tions. 

" In the closing days of last June, just before the 
recent provincial general elections, several carloads 
of poles were unloaded at Woodridge, and it was 

71 Cf. pp. 146-148, infra. 72 Cf. p. 30, supra. 



UNDER FIRST COMMISSION 77 

announced that the work of connecting up Wood- 
ridge with the provincial government's long distance 
telephone system would be gone on with immediately 
after the elections. 

" A number of voters were engaged, at the rate 
of $6 per day per man and team, to do the work of 
taking the poles out to the point to which it was 
stated the trunk telephone line would be completed 
in a week or two. 

" The Woodridge district is partly in the con- 
stituency of Emerson and partly in the constituency 
of Carillon. It is a predominantly Opposition dis- 
trict. 

" Within two weeks after the elections, a train 
of empty cars came along and gathered up all the 
telephone poles and brought them to Winnipeg 
again." 73 

The Free Press refers editorially to the incident 
as a case of " fishing for votes with telephone 
poles." 74 

In 1 9 10, the Government's policy of rapid con- 
struction did not take into account the state of the 
labor market, with the result that the Commission 
found it impossible to secure an adequate supply of 
experienced men fully to carry out that policy. In 
consequence, a number of rural and long distance 
lines had to be abandoned in the course of construc- 

73 The Manitoba Free Press, Winnipeg, October 8, 1910. 
™ Ibid. 



7 8 GOVERNMENT TELEPHONES 

tion and were unable to be completed until the sea- 
son of 19 1 I. 75 

FINANCIAL RESULT IN I91O AGAIN AN APPARENT 
PROFIT BUT A REAL LOSS 

The telephone accounts for 19 10 were again prac- 
tically meaningless. Although without doubt fewer 
maintenance expenses were charged to capital in 19 10 
than had been so charged in 1908 and 1909, never- 
theless the amount of maintenance improperly 
charged to capital was considerable even in 19 10. 
According to the accounts of the Telephone Com- 
mission there was an excess of revenue over ex- 
penditure of about $350,000; 76 but the Commis- 
sion was still without authority to set aside any 
reserve against depreciation, and their accounts did 
not — and could not — include the interest paid 
upon the telephone capital. If (1) all maintenance 
expenses had been properly charged against revenue, 
if (2) a reserve against depreciation had been in- 
cluded in current expenses and expenditures for re- 
construction had been excluded from current ex- 
penses, and if (3) interest on telephone capital had 
been shown, the accounts for 19 10 would have stood 
as follows : 77 

75 Report of the Commissioners of Manitoba Government Tele- 
phones for the year ending 31st of December, iqio. Sessional 
Paper No. 14. Sessional Papers. Legislative Assembly of Mani- 
toba. Session 1911, p. 583. 

76 Ibid, pp. 587-590. 

77 For details of this revision of the accounts, see pp. 54-57, supra. 



UNDER FIRST COMMISSION 79 

Gross Revenue $982,636 

Expenses : 

Operation $418,999 

Maintenance I35>3i6* 

Depreciation 2i5,357t 

Total Expenses 769,672 

Net Earnings 212,964 

Interest 278,50c) 78 

Deficit $65,536 

* This figure bears the same relation to plant cost as do main- 
tenance expenses in those years in which maintenance expenditure 
is shown as a separate item in the accounts. 

t Equivalent to 6% of plant cost at the end of the preceding year. 

Behind apparent profits, therefore, there was a 
real loss during the year of $65,000. Moreover, it 
is obvious that in the absence of a depreciation re- 
serve even apparent profits (after the deduction of 
the proper interest charges) could be maintained 
only so long as the actual reconstruction expenses 
each year were considerably less than the annual 
amount which would have been required to provide 
an adequate reserve against depreciation — either 
naturally less because of the comparative newness 
of the greater part of the plant or artificially less 
because of neglect of necessary reconstruction and 
failure to keep the plant up to standard. For three 
years the Government had succeeded in concealing 

78 Sessional Papers. Legislative Assembly of Manitoba. Session 
iQlly p. 57. The interest accounts for the year 1910 are very ob- 
scure, but a thorough study of all factors indicates that $278,500 is 
the amount of interest properly chargeable to telephone revenue 
for the year. 



So GOVERNMENT TELEPHONES 

the truth, but in 191 1, the fourth year of operation, 
the bubble of fictitious profits burst. 

When, after three years, the Government contin- 
ued to show no sign of adopting, or allowing the 
adoption of, any sort of commercial accounting, the 
Telephone Commissioners naturally became very un- 
easy. They were well aware that the surpluses 
which the Government had announced were wholly 
fictitious and that the accumulation of real deficits 
must eventually be disclosed, involving the Commis- 
sion as well as the Government in the discredit con- 
sequent upon the disclosure. The fact that the Gov- 
ernment were primarily responsible would not save 
the Commission. It was necessary that some dras- 
tic measure be adopted in order to bring the true 
state of affairs openly before the public so that the 
Government would be forced to take remedial ac- 
tion. No mere representations to the Government 
would have sufficed; the members of the Govern- 
ment had shown a persistent disregard of the facts 
— they would not even read the reports submitted 
to them from time to time by the Telephone Com- 
mission. The plain fact is that the members of the 
Government were wholly occupied in the petty tech- 
nique of party political management, with the sole 
purpose of keeping themselves in power; they were 
at once unable and unwilling to devote themselves 
to the task of comprehending the intricacies of the 
business the control of which they had, for political 



UNDER FIRST COMMISSION 8.1 

purposes, assumed. Even at that late date, the 
Government might have greatly ameliorated the sit- 
uation by frankly confessing that they had made 
three great mistakes, viz., the unnecessary and in- 
economical haste with which construction, especially 
of rural lines, had been pushed, the failure to provide 
a reserve against depreciation, and the reduction of 
the telephone rates. But such a confession, being 
politically inexpedient, was not made. 

FICTITIOUS PROFITS DISAPPEAR IN 191 1 ; AN AGGRE- 
GATE LOSS OF OVER $300,000 

The Telephone Commissioners could not go upon 
the public platform and denounce the Government 
for maladministration of the telephone finances, nor 
could they utilize the press for purposes of propa- 
ganda. There was, however, open to the Commis- 
sion one course which would inevitably force action 
— and this course the Commission took. What 
they did was to expend in 191 1 what they conceived 
to be necessary to bring the plant fully or nearly 
up to a reasonable standard, and to charge all main- 
tenance and reconstruction expenses against rev- 
enue. 79 No methods of bookkeeping could conceal 
the inevitable deficit which resulted — and the Gov- 

79 According to the annual reports of the Telephone Commis- 
sioners, maintenance and reconstruction expenses amounted to 
$282,000 (including maintenance expenses improperly charged to 
capital) in 1910 and to $500,000 in 1911. Sessional Papers. Legis- 
lative Assembly of Manitoba. Session 1911, p. 589; Session 1912, 
P- 534- 



82 GOVERNMENT TELEPHONES 

ernment were forced into a position of either meet- 
ing this deficit out of the general revenue of the 
Province or permitting an increase in rates; while 
at the same time deference to public opinion obliged 
the Government to abandon their obstinate refusal 
to provide a depreciation reserve. Thus, by its ac- 
tion, the Commission really rendered a great serv- 
ice to the Province, but a service which eventually 
proved to be self-sacrifice, for the Government at 
once began to hunt for a scapegoat upon whom their 
own sins might be cast. 

When the telephone accounts for 19 11 were pub- 
lished, 80 they showed that, after the deduction of in- 
terest charges, 81 there was a deficit of $153,000 on 
the year's operations. During the year all current 
expenses were charged against revenue; 82 but no 
reserve against depreciation was set aside. Upon 
recasting the accounts so as to include a depreciation 
charge and to exclude reconstruction expenses, the 
real deficit is seen to be even greater; for the plant 
account had greatly increased during 19 10 and a 
correspondingly larger depreciation charge was 
properly required. The recast accounts follow: 

80 Fourth Annual Report of the Commissioners of Manitoba 
Government Telephones, IQII. Sessional Paper No. 25. Sessional 
Papers. Legislative Assembly of Manitoba. Session 1912, pp. 
534-536. _ 

81 Sessional Papers. Legislative Assembly of Manitoba. Session 
1QI2, p. 60. 

82 So far as is known, all current expenses have been charged 
against revenue in each year subsequent to 1910. Cf. p. 54, supra. 



UNDER FIRST COMMISSION 83 

Gross Revenue $1,280,633 

Expenses : 

Operation $571,916 

Maintenance 218,618* 

Depreciation 347>932t 

Total Expenses s 1,138,466 

Net Earnings 142,167 

Interest 361,350 s3 

Deficit $219,183 

*This figure bears the same relation to plant cost as do main- 
tenance expenses in those years in which maintenance expenditure 
is shown as a separate item in the accounts. 

t Equivalent to 6% of plant cost at the end of the preceding year. 

Inasmuch as care has been taken to understate, 
rather than exaggerate, these real deficits, there can 
be no doubt that the losses during the first four years 
of Government ownership and operation exceeded 
three hundred thousand dollars ! 

GOVERNMENT POLICIES RESULT IN EXTRAVAGANCE, 
INEFFICIENCY AND DISCRIMINATION IN VIO- 
LATION OF PROMISES 

Perhaps it might be well to review briefly the chief 
specific causes of this financial debacle: 

(i) The Government's policy of rapid construc- 
tion, which was adopted without regard to the abil- 
ity of the telephone organization to carry it out and 
was continued in the face of unfavorable labor con- 
ditions, forced the Telephone Commission to employ 

83 Sessional Papers. Legislative Assembly of Manitoba. Session 

IQI2, p. 60. 



8 4 GOVERNMENT TELEPHONES 

men and to keep men on the pay-rolls who would not 
have been accepted or retained under normal condi- 
tions. 84 

(2) The Government's requirement that rural 
extensions be made in excess of the real demand 
therefor, also necessitated the construction of lines 
with one subscriber per mile instead of with an ade- 
quate number of subscribers per mile. 85 

(3) The Government compelled the Commission 
to transform toll offices into exchanges before the 
volume of business (actual or potential) warranted 
it; and the Government obliged the Commission to 
provide night and day service at small exchanges 
where day service only would have sufficed. When 
requested to do so by sufficiently influential persons 
the Commission was also forced to give free serv- 
ice between exchanges. 86 

(4) Not only did the Government interfere in 
many subtle ways with the conduct of the telephone 
business and not only did the members of the Pro- 
vincial Legislature of both parties exert influence 
upon the Commission to procure favors for their 
friends, but the people themselves also utilized these 
and other persons for the purpose of obtaining con- 
cessions through political pressure. 87 

(5) The people also took advantage of the Com- 

84 Cf. pp. 43 and 44, supra. 

85 Cf. pp. 38-39, supra. 

86 Cf. pp. 39 and 43-44, supra. 

87 Cf. pp. 39-40, 44-45, 50 and 67, supra. 



UNDER FIRST COMMISSION 85 

mission in almost every possible way. One result 
was that the estimated cost of construction of line 
plant was nearly always exceeded. In November, 
191 1, the Chairman of the Commission stated: 
11 Every mile of rural telephone lines which was esti- 
mated would cost us $150 four years ago, we have 
found by actual experience now costs us $20o"; 88 
in some cases the actual cost exceeded the estimated 
cost by over 100 per cent. A large part of this ex- 
cess must be attributed to the extortionate charges 
of hotel-keepers, liverymen, etc.; such persons habit- 
ually charged the Commission much higher prices 
than they charged other customers, and yet the Com- 
mission was bound to employ them either because 
they had a local monopoly or because they were sup- 
porters of the Government and were able to bring 
influence to bear to have their bills approved. In 
a memorandum, dated March 25, 19 12, Mr. Horan 
wrote to the Chairman of the Commission: "It 
should be brought out in relief that not only have 
we had to contend with the fact that politics came 
into the question so much, but apparently a large per- 
centage of hotel-keepers, storekeepers, and livery- 
men have been hand and glove w r ith our men — 
foremen and others — in cheating the Government. 
... It is of course understood that any remarks 
or suggestions I have made regarding the entry of 

8S Interview reported in the Manitoba Free Press, Winnipeg, 
November 4, 1911. 



86 GOVERNMENT TELEPHONES 

politics into the running of the business applies just 
as much to the one party as to the other, as I do not 
for a moment mean to say that if the Opposition 
were in power they would succeed any more than 
the present Government in eliminating this unpleas- 
ant feature from the business." 89 

(6) The reduction in rates made by the Govern- 
ment was obviously unjustifiable and costly. 

(7) The Government refused to provide any 
financial reserve whatsoever, even a reserve against 
depreciation. 90 

(8) All receipts from the telephone service were 
handed over to the Provincial Treasury and the Gov- 
ernment drew very heavily upon these telephone 
funds to conduct their decidedly amateurish financial 
operations, using telephone credits to meet the gen- 
eral expenses of the Province and thus obliging the 
Commission, both for current and for capital ex- 
penditure, to overdraw its bank account to an extent 
which was, under the circumstances, at once very 
large and very mischievous. 91 For instance, on De- 
cember 31, 1909, the overdraft of the Commission 
at the bank amounted to the considerable sum of 
$367, ooo. 92 Not only were such methods mani- 

89 Memorandum (typewritten), March 25, 1912. 

90 Cf. pp. 41-42, supra. 

91 Cf. p. 60, supra. 

92 This sum was procured from the bank by the Commission with 
only oral authorization on the part of the Government. Sessional 
Papers. Legislative Assembly of Manitoba. Session igio. Ap- 



UNDER FIRST COMMISSION 87 

festly inexpedient, but they were also exceedingly ex- 
pensive for the Commission. 

In this connection we may recall the promises of 
the Government that political considerations would 
be eliminated from the telephone management and 
that the service would be self-sustaining. 

LONG DISTANCE RATES INCREASED; PROPOSAL TO 
REVISE EXCHANGE RATES VIOLENTLY AT- 
TACKED BY THE PUBLIC 

Since the people, in spite of all subterfuges on the 
part of the Government, continued to hold the Gov- 
ernment responsible for telephone conditions, when 
it was seen (early in 191 1) that an indication of the 
real financial results of the telephone system would 
shortly become public property, the Government 
found itself in a highly vulnerable position; and in 
order to relieve the Treasury from the financial em- 
barrassment which would necessarily result from 
having to meet continuous telephone deficits, the Gov- 
ernment resolved upon drastic action. It deter- 
mined to raise the telephone rates, though in doing 
so it was obliged to repudiate another pledge and to 
admit that in undertaking to give a telephone service 
at one-half the Bell rates, it had been altogether 
wrong. 

pendix A. Evidence Taken before the Public Accounts Committee 
during the Session of igio, pp. 700-701. 



88 GOVERNMENT TELEPHONES 

The Government's first step in this direction 
took place in the spring of 191 1, when it con- 
sented to the Commission's proposal to increase long 
distance revenue by abolishing the reduced rates for 
long distance service at night and — in day service 
— by substituting an initial period of two minutes 
in place of the existing initial period of three min- 
utes, though retaining the same, or nearly the same, 
rate for the two-minute period as had been charged 
for the three-minute period. The rates for each 
additional minute in excess of the initial period were 
also raised. The new schedule, which went into ef- 
fect on May 1, 191 1, therefore involved a consid- 
erable, though indefinite, increase; indeed, the Manx- 
toba Free Press concluded that " the cost of long 
distance telephoning will be just about doubled." 93 

Then, in November, 191 1, the Commission an- 
nounced to the public that the telephone accounts for 
that year, when published, would show a loss of 
$150,000 and that the Commission intended to rec- 
ommend to the Government certain changes in the 
classification of subscribers. 94 The proposed sched- 
ule of rates, thus presaged in this announcement, was 
approved by the Government and announced by the 
Commission on December 12, 19 n. 95 Incidentally, 
it should be noted that when the reductions were an- 

93 The Manitoba Free Press, Winnipeg, April 13, 1911. 

94 Cf. Winnipeg newspapers of November 4, 1911. 

95 Cf. Winnipeg newspapers of December 13, 1911. 



UNDER FIRST COMMISSION 89 

nounced, the Government took upon themselves the 
task of announcing them, 96 but that when any in- 
creases were to be announced the Government re- 
quired the Commission to assume the responsibil- 
ity. 97 

The proposed schedule was as follows : 98 

Winnipeg. 

(Installation charge of $2.50 on each new line.) 

a) Business Service. 

Individual line ... $4 per month, allow- 
ing 100 calls per month without addi- 
tional charge; calls in excess of 100, 2 
cents each. 

Individual Line, Prepayment Service . . . 
guarantee of minimum revenue of 10 
cents per day required; each call 5 cents, 
but a rebate of 2 cents on each call in 
excess of guaranteed minimum. 

b) Residence Service. 

Individual line ... $4 per month, allow- 
ing unlimited service. 

Individual line . . . $1.50 per month, al- 
lowing 30 calls per month without addi- 
tional charge; calls in excess of 30, 2 
cents each. 

96 Cf. p. 62, supra. 

97 The Government thus paved the way for diverting to the 
Commission the brunt of the subsequent attack upon the rates. 

98 The Winnipeg Telegram, December 13, 191 1. 



9 o 



GOVERNMENT TELEPHONES 



Individual Line, Prepayment Service . . . 
same rate as in the case of business serv- 
ice. 

(The radius of the exchange area was increased 
from two to three miles. Party lines within the ex- 
change area were abolished.) 

All Other Exchanges, (i.e., all exchanges except 
Winnipeg.) 



No. of Subscribers in Exchange 



Annual Subscription 



Business Residence Rural 



Less than ioo (day service only) . . 
Less than ioo (continuous service) . . 

ioo - 200 

200 - 300 

300 - 400 

400 - 500 

500-1000 

1000-5000 



$25 
31 
31 
32 
34- 
36 
40. 
45 



l>i5. 
18. 
18. 

19. 
21. 

23. 

24. 
27. 



$20. 
25. 
25. 
26. 
27. 
29. 

3i- 

36. 



Ten per cent, discount for prompt payment of six months' subscrip- 
tion in advance. 

The proposed rates were to apply, from April 1, 
19 1 2, to all subscribers and from January 1, 19 12, 
to new subscribers. As may be seen, the schedule 
made the measured rate system compulsory (instead 
of optional) for business service in Winnipeg; it 
abolished all flat rates in Winnipeg except for in- 
dividual line residence service (the rate for which 
was increased from $25 to $48 per year) ; and it 
increased the flat rates in small towns and in rural 
districts in almost every case. 



UNDER FIRST COMMISSION 91 

The reasons for the proposed adoption of an 
obligatory measured rate system in Winnipeg were 
thus explained by the Chairman of the Telephone 
Commission in a statement to the press : 

" The number of calls per subscriber (in Winni- 
peg) is more than double that in the cities of Great 
Britain, Germany, Australia, and the United States, 
where measured service is now fully developed. 
This indiscriminate use of the telephone not only pro- 
duces congestion, but is primarily the first cause for 
any poor service that may be experienced by the sub- 
scriber. It is this waste of 100,000 calls a day 
that has led the Telephone Commission to recom- 
mend to the government that measured service for 
Winnipeg can be introduced under conditions that 
will make the telephone even more reasonable in 
price than it is under the flat rate. It will reduce 
the cost of operation to a very large extent, provide 
a better service, and will be so regulated that the 
heavy users will pay for the service they receive and 
not, as in the past, have such service paid for by the 
small user." " 

Although this application of the measured service 
principle of rate-making was, under the circum- 
stances, technically justifiable, yet events showed that 
at the time it was announced it was a tactical blun- 
der. An increase of the rates for unlimited service, 
to which the people were accustomed, would with- 

09 ] The Winnipeg Telegram, December 13, 1911. 



92 GOVERNMENT TELEPHONES 

out doubt have aroused opposition; but the strength 
of such opposition could hardly have been so great 
as that which the novelty of compulsory measured 
service actually encountered. Moreover, the nov- 
elty of the proposal served to focus public discus- 
sion and agitation upon the rates themselves, while 
the causes underlying the rates were obscured. 
Thus in Winnipeg an essentially false issue was 
raised. 

Immediately upon the announcement of the pro- 
posed schedule (December 12, 1911), a storm of 
disapproval swept over the Province. 1 Public 
meetings of protest were held. Petitions of remon- 
strance were circulated. Business men welcomed 
opportunities to give their views for publication and 
expressed their indignation vociferously. The Op- 
position and the independent press were swamped 
with vibrating letters from outraged subscribers. 
Ardent supporters of the Government were unable 
to restrain their wrath. The vitriolic outbursts of 
irate citizens nearly exhausted the supply of con- 
demnatory epithets and adjectives. " Outrageous," 
" ridiculous," " impossible," " preposterous," " out- 
landish," " absurd," " nonsensical," " unreasonable," 
and " extortionate " were among the many kindred 
terms which were applied to the proposed rates. 
Even the Telephone Commissioners did not escape 
the torrent of denunciation and abuse with which the 

1 Cf. contemporary Manitoba press. 



UNDER FIRST COMMISSION 93 

Government was deluged. In addition, many bitter 
complaints were made as to the quality of the serv- 
ice, which was frequently compared — unfavorably 
— with the service under the Bell Company; indeed, 
one of the arguments advanced by the Chairman of 
the Commission in defence of the proposed schedule 
was to the effect that the adoption of measured serv- 
ice rates would greatly improve the quality of the 
service — a virtual admission that the service had 
deteriorated under Government control. Many 
manifest instances of inefficiency and extravagance 
were also pointed out in the public press. For 
present purposes it will suffice to dismiss this destruc- 
tive criticism with merely calling attention to the self- 
evident fact that the complaint as to " exorbitant " 
rates in the days of the Bell Company was insignifi- 
cant in comparison with this popular attack on the 
schedule prepared by the Commission. 

The business men of Winnipeg, however, did not 
confine themselves to destructive criticism; a num- 
ber of commercial associations endeavored to offer 
some constructive criticism in regard to the local 
rates. For instance, on December 13, 191 1, the 
directors of the Industrial Bureau of Winnipeg ap- 
pointed a committee to discuss " the increase of tele- 
phone rates with the authorities of the province"; 
and on December 19th, the Winnipeg Board of 
Trade also appointed a committee to inquire into the 
telephone situation. These two committees pro- 



94 GOVERNMENT TELEPHONES 

ceeded to cooperate, though they rendered separate 
reports. Both committees condemned the failure 
to provide any reserve against depreciation and both 
called attention to the prejudicial effect of revenue 
resulting from the unwarranted reduction of the resi- 
dence rate in 1909. Both committees found oper- 
ating expenses unduly high — though neither was 
able to explain why 2 — and both concluded that con- 
siderable economies in expenses could be effected. 
In view of the increased expenses, both committees 
recognized the necessity for an increase in revenue. 
However, in suggesting rate schedules which, in their 
opinions, would provide the additional revenue re- 
quired, the committees were not in agreement: the 
Board of Trade committee and Mr. Christie of the 
Industrial Bureau committee recommended flat rates 
only, while Mr. Piper of the Industrial Bureau com- 
mittee favored measured service in addition to un- 
limited service. On the other hand, both commit- 
tees were unanimous in urging the use of two and 
four party lines. 3 

Some of the critics of the Government — notably 
the Manitoba Free Press — continued to attribute 
the failure of the telephone enterprise to the price 
paid for the plant acquired from the Bell Company, 

2 These committees did not deal with the question of the relation 
of the Government to the Telephone Commission. 

3 Report of A Citizens' Committee of Inquiry as to Local Telephone 
Rates. The Winnipeg Industrial Bureau, March 26, 1912. Re- 
port of the Telephone Committee, The Winnipeg Board of Trade, 
March 26, 1912. 



UNDER FIRST COMMISSION 95 

alleging that the price was excessive. The defence 
of the purchase price which the Government made 
at the time, however, is certainly very convincing. 
It will be remembered that the Government con- 
tended that the reasonableness of the purchase price 
would be proved by consideration of such factors 
as that the plant purchased included much advance 
construction, that the Bell Company accepted pay- 
ment in Provincial bonds at par, that the alternative 
to purchase was costly and precarious competition, 
that an allowance was properly made for forced sale, 
and that there were other legitimate intangibles. 4 
Nevertheless, even assuming that the purchase price 
was excessive, its financial failure cannot be ascribed 
to that cause. The margin between success and! 
failure was not so small that a reduction of even as 
much as $50,000 a year in interest charges would 
have served to turn the scales, for the real deficit 
in 191 1 was over $200,000; 5 and any argument that 
the rates had to be r.aised as a result of the burden 
of an excessive purchase price, cannot be held as 
valid. 6 

4 Cf . pp. 29-31, supra. 

5 Cf. pp. 81-83, supra. 

6 Vague suggestions were made about corruption in connection 
with the purchase. However, not only has no specific charge been 
made against any one, but the circumstances of the time seem to pre- 
clude the possibility of any corruption having existed in that con- 
nection. 



96 GOVERNMENT TELEPHONES 

APPOINTMENT OF A ROYAL COMMISSION, UNDER THE 
CONTROL OF THE GOVERNMENT, TO INVESTI- 
GATE THE TELEPHONE COMMISSION 

In replying to the critics of the proposed rate 
schedule, the members of the Government endeav- 
ored to divert the entire attack to the Telephone 
Commission. They admitted that they knew noth- 
ing about telephones and stated that they had as- 
sented to the new schedule with great reluctance, 
and only upon the urgent advice of the Commission, 
to which they gave a clean bill of health as being 
composed of competent and efficient telephone spe- 
cialists. 7 The whole responsibility lay with the 
Commission, they said; the Government had merely 
endorsed what the Commission, with its technical 
knowledge, had seen fit to prepare. So great was 
the violence of the attack, however, that the Gov- 
ernment were forced, in self-protection, to adopt 
some more plausible means of appeasing public in- 
dignation. Accordingly, by an order-in-council 
dated the thirtieth of January, 19 12, the Govern- 
ment appointed a Royal Commission of Inquiry, 
composed of Mr. Justice Locke of the Manitoba 
bench, Mr. G. R. Crowe of Winnipeg and Mr. R. L. 

7 For example, on January 4, 1912, the Premier said: "We have 
implicit faith in our (telephone) commissioners. We believe they 
are honest, capable men, loyal to the interests entrusted to them." 
The Tribune, Winnipeg, January 5, 1912. 



UNDER FIRST COMMISSION 97 

Barry of Minneapolis. 8 This Royal Commission 
appointed a Counsel, a Secretary, and a firm of ac- 
countants to aid in the examination of the accounts, 
and began its proceedings on February 2, 19 12. 
The Commission held sessions at Winnipeg and at 
various places throughout the Province, and in- 
spected the telephone plants at St. Paul and Min- 
neapolis (Minn.), La Crosse (Wis.), and Chicago 
(111.) ; 234 witnesses were examined and 7080 folios 
of evidence were obtained, at a total cost of $22,- 
ooo. 9 The final Report of the Commission was 
dated May 20, 19 12, but was not made public by 
the Government until June 14. 10 

Almost at the outset of their final Report, the 
Royal Commission made this extraordinary admis- 
sion: 

8 Interim Report. Sessional Paper No. 19. Sessional Papers. 
Legislative Assembly of Manitoba. Session 1912, pp. 508-9. The 
shrewd politicians comprising the Government went through the 
ceremony of having the Telephone Commission formally request the 
Government for the appointment of the investigating committee, 
whereupon the Government formally consented to the request. (Cf. 
the Manitoba Free Press, Winnipeg, January 11, 1912.) In spite of 
this elaborate pretense — which was typical of the subterfuges 
habitually practised by the Government — there can be no doubt that 
the initiative in the matter was taken by the Government. Cer- 
tainly the Government carefully reserved to itself the right of deter- 
mining the scope of the inquiry, which, as will be seen, was the all- 
important factor. 

9 The Manitoba Free Press, Winnipeg, June 14, 1912. This evi- 
dence was not published by the Government. The only form in 
which it exists is in the typewritten copies of the Stenographic Re- 
port. 

10 The Report of the Royal Commission was published only in the 
newspapers; e.g., the Manitoba Free Press, Winnipeg, June 14, 
1912. 



9 8 GOVERNMENT TELEPHONES 

u A rather remarkable incident of the sessions of 
Winnipeg, in view of the deep interest undoubtedly 
taken by the public in the question, was the almost 
complete absence of volunteer evidence, a small dele- 
gation from Binscarth and one citizen of Winnipeg 
being the only volunteer evidence that was brought 
before your Commissioners at the Winnipeg Ses- 
sions. ... At the meetings throughout the country 
there was invariably a very large attendance of the 
public. The Winnipeg Sessions were characterized 
by almost absolute indifference on the part of the 
public, as indicated by non-attendance.' ' n 

This phenomenon of public indifference in Winni- 
peg deserves analysis. Although without doubt it 
was partly due to the volatile character of the com- 
munity, yet it suggests two further explanations 
which are not inconsistent and are therefore prob- 
ably both applicable. The first explanation lies in 
the habit of leaning upon the Government which is 
observable in communities of the type to which Man- 
itoba belongs, — a habit which results in feverish 
anxiety to get the Government to deal with a mat- 
ter, followed by complete relaxation of interest as 
soon as the Government undertakes to deal with it. 
This habit was apparent at the time of the acquisi- 
tion of the telephone system and its recurrence is 
not strange. 

But another explanation is equally valid, namely, 

11 Report of the Royal Commission. 



UNDER FIRST COMMISSION 99 

a distrust of the good faith of the investigating 
Commission; for an analysis of the powers con- 
ferred upon the Royal Commission by the Govern- 
ment discloses the fact that the Commission was 
authorized to investigate only the acts of the Tele- 
phone Commission. The relation of the Govern- 
ment to the telephone enterprise was therefore in- 
ferentially excluded from the scope of the inquiry. 
Indeed, the reference to the Royal Commission was 
quite precise: it was authorized to investigate " the 
conduct and administration " of the Manitoba Gov- 
ernment Telephones by the Telephone Commission 
appointed January 15, 1908; and in calling for evi- 
dence by means of public advertisements, the Royal 
Commission requested to hear from all associations 
and individuals " having complaints against the said 
administration" 12 Thus there was no pretense of 
any thorough inquiry: the subjects of investigation 
were to be the charges against the Telephone Com- 
mission, and, in its Report, the Royal Commission 
took credit to itself for having endeavored to induce 
such charges to be made. It is certainly clear that 
the Government, finding itself in danger from the 
indignation of the public, had resolved to sacri- 
fice the Telephone Commissioners and had conse- 
quently put the Commissioners in the position of 
culprits at the bar — while the scales of justice were 
loaded against them. There is reason to believe 

12 Report of the Royal Commission (opening paragraphs). 



ioo GOVERNMENT TELEPHONES 

that the Winnipeg public suspected the intention of 
the Government and did not choose to lend assist- 
ance to a farce in which the Government pretended 
to assume a disinterested attitude but actually care- 
fully concealed all important relevant matters. If 
this was the reason for the absence of the Winnipeg 
public from the sessions of the Royal Commission, 
their absence was very creditable to them: they re- 
fused to be parties to proceedings which could not 
fail eventually to bring discredit upon every one 
concerned. 

Since the evidence taken by the Royal Commis- 
sion continued until the end of April, before discuss- 
ing this evidence chronology demands reference to 
two matters of record, indicative of the spirit in 
which the inquiry was conducted. Under date of 
March i, the Royal Commission made a brief interim 
report, consisting of a recommendation that the en- 
forcement of the proposed rate schedule be post- 
poned until the conclusion of the inquiry. 13 There 
is no doubt that this recommendation was inspired 
by the Government, who thus utilized the inquiry 
as a means of unostentatiously disposing of the pro- 
posed rates — for the rates, thus indefinitely post- 
poned, were quietly killed. A fortnight later, in 
the Legislative session of March 14, 19 12, the Op- 
position leader, evidently realizing that the Royal 

^Interim Report. Sessional Paper No. 19. Sessional Papers. 
Legislative Assembly of Manitoba. Session 1912, pp. 508-9. 



UNDER FIRST COMMISSION 101 

Commission was largely under the thumb of the Gov- 
ernment, moved that a committee of the Legislature 
be appointed " to examine and inquire into all mat- 
ters relating to the Manitoba Telephone System." 14 
The Government vigorously opposed this proposal 
and on a straight party vote it was defeated. 15 

TELEPHONE MISMANAGEMENT ASCRIBED BY THE 
ROYAL COMMISSION TO THE TELEPHONE COM- 
MISSION INSTEAD OF TO THE GOVERNMENT 

From the proceedings of the Royal Commission 
it soon became evident that even the form in which 
the questions were put — when the evidence was be- 
ing taken — showed the influence of the Govern- 
ment. Moreover, the interrogations by the mem- 
bers of the Royal Commission were lacking in pre- 
cision; even those of the technical member of the 
Commission (Mr. Barry of Minneapolis) were 
characterized by vagueness. Members of the Tele- 
phone Commission were expected to answer from 
memory questions relating to accounts which were 
not placed before them, and conclusions were thus 
often based upon inaccurate or incomplete data. 
The Royal Commission also endeavored to cause 
the Telephone Commissioners to commit themselves 
to conclusions which had already been reached by 
the Royal Commission. Quite unfounded assump- 

14 Journals of the Legislative Assembly of Manitoba, Session igi2 t 
p. 87. Cf. the Manitoba Free Press, Winnipeg, March 15, 19 12. 

15 Ibid., p. 88. 



102 GOVERNMENT TELEPHONES 

tions which had been manufactured by members of 
the Government were introduced into interrogations 
and the Telephone Commissioners found themselves 
in a dilemma: they had either to initiate an attack 
upon the Government or to fence with the question. 
Nevertheless, in spite of all the difficulties with 
which they were continually beset, throughout the 
inquiry the Telephone Commissioners never made 
any reflections on the Government, thus displaying 
a standard of loyalty and honor quite consistent with 
their characters. A thorough realization of this at- 
titude on the part of the Telephone Commissioners 
is essential to a proper perspective for considering 
the evidence before the Royal Commissioners, as 
over and over again the Telephone Commissioners 
were made to appear responsible for practices and 
conditions over which they had been deprived of 
control. 16 

In view of the partiality of the inquiry and the 
various assumptions, allegations and inaccuracies 
which appeared in the interrogations of the Royal 
Commissioners, it is not worth while to accord much 
space to the details of the evidence before the Royal 
Commission. In mere justice to the Telephone Com- 
missioners, however, it is necessary to call attention 
again to the real causes for the existence of some of 
the conditions and practices for which the Commis- 
sioners, on the face of the evidence, seemed to be 

16 Cf. Stenographic Report passim. 



UNDER FIRST COMMISSION 103 

the responsible agents. For example, the Report of 
the Royal Commission comments upon the excessive 
quantity of supplies which the Telephone Commis- 
sion kept in stock, pointing out for instance that on 
December 31, 191 1, there were 162,763 poles on 
hand, while nearly 20,000 more were contracted for 
but had not been delivered. " In fact," adds the 
Report, " poles were in hand at the beginning of this 
year sufficient at 40 poles per mile to build 4069 
miles of pole line, which is within a very little of 
the total pole mileage constructed in the last four 
years." At that point, however, the Report stops 
abruptly, no mention being made of the reason for 
this excessive supply of poles. But the explanation, 
it will be remembered, has already been given: the 
Telephone Commission had practically been obliged 
by a member of the Government to purchase an ex- 
cessive number of poles from a client of his who was 
in financial difficulties. 17 Again, the Report of the 
Royal Commission drew attention to the excessive 
amount invested in real estate, but entirely neglected 
to mention the fact that in connection with purchases 
of real estate, agents of the Government busied 
themselves to obtain commissions. 18 

In regard to the annual maintenance costs and the 
accounts of maintenance expenditure, the evidence 
before the Royal Commission was particularly dam- 

17 Cf. p. 40, supra. 

18 Cf. the Manitoba Free Press, Winnipeg, March 6, 1908; The 
Tribune, Winnipeg, March 4, 1908. 



io 4 GOVERNMENT TELEPHONES 

aging to the Telephone Commission; but even super- 
ficial analysis will relieve the Commission of respon- 
sibility for an undoubtedly pernicious state of affairs. 
In regard to the accounts, the Commission was de- 
prived of financial control — as has already been 
fully explained 19 — and thus reconstruction expenses 
were included with maintenance expenses. In re- 
gard to costs, as a result of the Government's policy 
of rapid expansion, the Commission found great 
difficulty in finding competent employees, partly be- 
cause of the contemporary economic conditions in 
Manitoba and partly because of political conditions: 
the Commissioners scarcely dared to venture to ap- 
point people from a distance even if they w r ere pro- 
curable and, being confined to residents of Manitoba, 
they were forced to take Government nominees, 
partly through political pressure and partly because 
men were scarce. 20 Large numbers of the men who 
had to be employed were unfamiliar w 7 ith the work 
which they were required to do. Even " plant 
chiefs " w 7 ere unequal to the tasks assigned to them; 
and thus the discipline of the working gangs was 
very defective. Incompetent foremen were pro- 
moted to responsible positions because there w r as no 
alternative or appeared to be none. The Construc- 

13 Cf. p. 4.1, supra, et passim. Another explanation perhaps is 
that the Government did not require, and perhaps did not desire, 
scrupulous accuracy in accounting. It was easier to hide deficiencies 
when the accounts were kept in a loose manner. 

20 Cf. pp. 40, 44 and J7, supra, and p. 106, infra. 



UNDER FIRST COMMISSION 105 

tion Engineer was helpless ; he not only had to work 
with the material at his disposal, but he had to force 
the work. During 191 o, 25 to 35 crews were work- 
ing and it was impossible to provide a skilled fore- 
man for each crew. Under such conditions it was 
inevitable that a certain amount of fraudulent prac- 
tice should arise. 21 In 191 1 the construction was 
pushed into very difficult country, topographically, 
while the season was very rainy — all of which in- 
volved unusually high expenses. 22 

While the technical and the labor conditions 
rendered both maintenance and construction costly, 
these were not the only conditions which made for 
excessive expenditure — there was always the per- 
vasive political influence. For example, the follow- 
ing statement, though colored with political partisan- 
ship, is so consistent with known facts that some 
weight must be attached to it. The statement was 
contributed to the Manitoba Free Press by a cor- 
respondent at Brandon: "A high official of the 
government telephone system here, let the cat out 
of the bag this morning. Speaking to a staff man of 
the Free Press who is a stranger to him he stated in 
the most emphatic terms that every branch of the 

21 In a number of instances, construction foremen secured vouch- 
ers for larger sums than they had actually expended — and pocketed 
the difference. There was also a certain amount of leakage in con- 
nection with supplies. 

22 Cf. Fourth Annual Report of the Commissioners of Manitoba 
Government Telephones, igii. Sessional Paper No. 25. Sessional 
Papers, Legislative Assembly of Manitoba, Session 1912, p. 533. 



106 GOVERNMENT TELEPHONES 

telephone system in the province was being used for 
political purposes. ' Some of my men,' he said, 
1 have been working practically night and day dur- 
ing the past three weeks and a great sigh of relief 
will go up from every telephone man when the elec- 
tions are over. 23 In the Brandon district several 
extra gangs were put on a short time ago to get the 
goodwill of the people and at the present time in 
this one district w r e have no less than 42 gangs work- 
ing, each one of which is composed of 25 to 35 men. 
In addition to that canvassers have been sent out, 
not only through this district, but every part of Man- 
itoba, to have the farmers sign applications in the 
belief that a telephone line is about to be installed 
by a generous government. The whole thing is one 
huge political graft and we who are rushed to death 
are heartily sick of it.' " 24 

Another contemporary criticism from the Free 
Press may be held to state the case accurately: 
" The deterioration of the telephone service is a 
standing proof of the manner in which the combi- 
nation of public ownership and machine politics re- 
sults to the injury of the farmer. The complaints 
of the unsatisfactoriness of the telephone service are 
constant. That unsatisfactoriness has gone on in- 
creasing since the beginning of the present system 
in the Province of having the telephone system ad- 

23 The elections referred to were those of July n, 1910. 

24 The Manitoba Free Press, Winnipeg, July 9, 1910. 



UNDER FIRST COMMISSION 107 

ministered by a Commission which is hampered and 
obstructed by politics. The Commissioners are not 
politicians. But they have to do what the politi- 
cians in power v/ant done. The result is that the 
system is loaded with employees appointed for po- 
litical reasons. ... If the Commissioners were in- 
dependent of the control of the politicians, they 
would manage the telephone system on purely busi- 
ness lines. As it is, they have to administer it on 
political lines." 25 

Strictly non-partisan newspapers were scarcely less 
severe. For example: " There is no mincing of 
matters by the man-in-the-street, whether Grit or 
Tory; it is felt that the undoubted managerial abil- 
ity of the Chairman of the Telephone Commission 
• . . and of other able officials, is too largely offset 
by indirect, if not direct, influences not unconnected 
with politics. " 26 

The Royal Commissioners made no mention of 
accrued depreciation or of a sinking fund for the 
amortisation of the debt. The only reference to a 
related question is in the following brief sentences: 
'' Up to 1912 there has not been any replacement 
account, such expenditure being included in mainte- 
nance. We are of opinion that such account should 

25 The Manitoba Free Press, Winnipeg, June 21, 1910. 

26 Canadian Finance, Winnipeg, December 20, 1911. It is need- 
less to state that members of the Government of course always denied 
such charges and insisted that the Commission was not subject to 
political influences. 



108 GOVERNMENT TELEPHONES 

be instituted. " 27 The implication is that the Tele- 
phone Commission was responsible for the fact that 
no reserves of any kind were set apart. The state- 
ment is thoroughly disingenuous. The question of 
depreciation alone was vital to the whole inquiry. 
The sole power to provide reserves lay not with the 
Telephone Commission, but with the Government; 28 
yet the Royal Commissioners chose to ignore this 
important fact; and a ridiculous climax was reached 
when, in their Report, the Royal Commissioners 
completely whitewashed the Government. 

By instruction of the Royal Commission, Messrs. 
Webb, Read, Hegan, Callighan and Co., Chartered 
Accountants, made an examination into the system 
of bookkeeping used by the Telephone Commission 
during the years 1909 to 191 1 ; but this examination 
was not permitted to include an audit of the books. 29 
In their Report, the accountants indicated that from 
the beginning of Government operation the system 
of bookkeeping employed was scarcely commensurate 
with the magnitude of the undertaking. 30 It must 
be realized that prior to the acquisition of the 
telephone system by the Government, the records of 
transactions were all forwarded to the head office at 
Montreal where the books of the Bell Company were 
kept. When the Government took over the system, 

27 Report of the Royal Commission. 

28 Cf. pp. 41-42 and 71, supra. 

29 Accountants' Report (typewritten), May 15, 1912. 

30 Ibid. 



UNDER FIRST COMMISSION 109 

it was clearly their duty to transfer the functions 
previously exercised by the head office either to the 
Telephone Commissioners or to the Telephone De- 
partment. As a matter of fact, however, the Gov- 
ernment adopted neither course. They entertained 
the fantastic idea that head office functions were un- 
necessary; indeed, one of their arguments in favor 
of the acquisition of the system was that the head 
office expenses would thereby be eliminated alto- 
gether. 31 Moreover, when the Telephone Commis- 
sion was appointed, the control over construction was 
expressly reserved to the Telephone Department, 
i.e., to the Government. 32 Yet the construction had 
to be carried out by the officers of the Commission, 
and the supplies in the hands of the Commission had 
to be drawn upon for construction purposes. The 
result was inevitable confusion between the construc- 
tion and the operating accounts, and great confusion 
in the stores accounts. Some of the defects in ac- 
counting were gradually remedied; but even apart 
from the confusion entailed by the division of re- 
sponsibility, it would appear that the internal organ- 
ization of the system was not able to expand to keep 
pace with the excessive speed in construction de- 
manded by the Government. 33 

As has been indicated, throughout the long course 
of the Telephone Investigation from the beginning 

31 Cf. p. 33, supra. 33 Cf. pp. 43-44, supra. 

32 Cf. p. 37, supra. 



no GOVERNMENT TELEPHONES 

of February until the end of April, 19 12, the Tele- 
phone Commissioners conducted themselves with 
dignity and, for the most part, in silence. The 
Royal Commissioners explicitly state in their Report 
that they received from the Telephone Commission- 
ers, upon requisition, " a tremendous amount of sta- 
tistical and other information"; and they express 
their obligations to the Telephone Commission, — - 
especially to the Chairman for " the courteous and 
kindly manner in which he responded to our constant 
demands upon him." The Royal Commissioners, 
however, felt that they should " report that all evi- 
dence got was the result of and in answer to our own 
efforts and requisitions, and the (Telephone) Com- 
missioners apparently did not consider it their duty, 
and as a matter of fact did not offer or volunteer any 
evidence whatever in aid of the inquiry or other- 
wise." 34 

This naturally was the dignified course for the 
Telephone Commissioners to pursue. The Chair- 
man of the Telephone Commission must have real- 
ized the fraudulent character of the Royal Commis- 
sion. He could not impede it, but he could at least 
refrain from giving its ridiculous proceedings the 
advantage of his spontaneous assistance. The in- 
justice and cowardice of the Government are beyond 
description. The members of the Government 
knew perfectly well what they were doing: they were 

34 Report of the Royal Commission. 



UNDER FIRST COMMISSION in 

deliberately making scape-goats of men whom they 
had induced to enter their service on the pretense 
that they intended to conduct the telephone business 
on sound commercial lines. When the Telephone 
Commissioners pointed out that the policies of the 
Government were inconsistent with sound business 
principles, they were told that their advice was not 
wanted; but when these policies aroused the indig- 
nation of the public, the members of the Govern- 
ment attempted to divert that indignation upon the 
heads of the Commission by instituting a tribunal 
for the purpose of trying the Commissioners as if 
they were culprits, — an ingenious but discreditable 
device. 

In general the Report of the Royal Commission- 
ers is an inconclusive and unsatisfactory document, 
for the conduct of the Telephone Commissioners 
was inquired into and not the conduct of the Gov- 
ernment. At every point the inquiry led to the 
threshold of the Government — but there it stopped. 
Instead of honestly taking their share of the blame, 
the Government chose the dishonorable course of 
virtually prosecuting the Commissioners, whose 
faults arose solely from the fact that they were con- 
sistently loyal to a Government which was disloyal 
to them. The people of Winnipeg, irrespective of 
political party, seemed to have understood the sit- 
uation and spontaneously declined to be parties to 
the infamous proceedings. 



ii2 GOVERNMENT TELEPHONES 

RESIGNATION OF THE TELEPHONE COMMISSION 

When the Report of the Royal Commission was 
presented toward the end of May, 19 12, the Gov- 
ernment — in spite of the fact that nothing what- 
ever to the discredit of the members of the Tele- 
phone Commission had emerged during the sessions 
of the Royal Commission — appear to have reached 
the conclusion that the easiest method of extricating 
themselves from the difficulties in which they were 
involved, would be to have the two remaining Com- 
missioners sever their connections with the telephone 
system. 35 Now, if the Commissioners were dis- 
missed from office they would be in a position to 
embarrass the Government by disclosing the true 
state of affairs; but if they could be induced to re- 
sign, the faults of the Government would be carried 
with them into oblivion. An emissary of the Gov- 
ernment succeeded in securing the resignations of 
the Commissioners to take effect on July 1, 19 12, 
although they did not actually leave office until two 
weeks after that date. That the resignations were 
in a manner forced, there can fre no doubt; yet the 
withdrawal of the Commissioners " saved the face " 
of the Government and afforded the members of the 
Government an opportunity of rehabilitating their 
declining political fortunes. 

35 The Commissioner Auditor had resigned on February 17, 1912. 
Cf. the Manitoba Free Press, Winnipeg, February 17, 19 12. 



UNDER FIRST COMMISSION 113 

The following is a copy of the letter of resigna- 
tion addressed to the Premier, dated June 27, 19 12, 
and signed by both Commissioners : 

" Pursuant to your request just conveyed through 
the Hon. Mr. Coldwell, we hereby tender our resig- 
nation as Commissioners of Manitoba Government 
Telephones, to take effect July 1st, 19 12, and in do- 
ing so may we express the hope and belief that 
neither your Government nor our successors will be 
misled by the gross misstatements of fact, and the 
erroneous opinions and conclusions expressed in the 
Royal Commission's report." 

With the resignation of the Telephone Commis- 
sioners, the first phase of the history of the Mani- 
toba Government telephone system comes to a close. 
The entire period was dominated by political influ- 
ence and political considerations, more or less ef- 
fectually concealed behind the elaborate pretenses' 
and the fair words of the Government. The pledge 
of non-partisan commercial management was not 
kept. The Bell rates, far from being " cut in two " 
as promised on so many occasions, were maintained 
intact for fifteen months, when the Government ef- 
fected such slight reductions as might best redound 
to their political advantage. These unwarranted 
reductions, when combined with the political ac- 
counting methods employed by the Government, con- 



ii 4 GOVERNMENT TELEPHONES 

tributed largely to the disastrous failure to fulfill the 
promise that the service would be self-sustaining. 
Finally, finding themselves in jeopardy from the 
wrath aroused by the force of the contrast between 
promise and performance, the Government delib- 
erately sacrificed their loyal servants that their own 
sins might go unpunished. After four years of 
public ownership a prosperous business was well 
along the road to ruin. 



Ill 

THE GOVERNMENT SYSTEM 
REORGANIZED 

APPOINTMENT OF A SINGLE TELEPHONE COMMIS- 
SIONER FOLLOWED BY OSTENSIBLE, BUT LARGELY 
INEFFECTUAL, ADMINISTRATIVE REFORMS 

Upon the sudden, though not undesired, resigna- 
tion of the Telephone Commission originally ap- 
pointed, it was incumbent upon the Government im- 
mediately to give some outward and visible sign of 
an intention to purge the Provincial telephone sys- 
tem of the more conspicuous of the evils which ac- 
companied political control; for a reform of the 
system — or at least the semblance of a reform — 
was essential to the Government's political welfare. 
Accordingly, on July I, 19 12, Mr. R. L. Barry — 
who had been a member of the Royal Commission 
; — was appointed to act as sole Telephone Com- 
missioner, and was charged with the duty of re- 
organizing " the property and management " * so 

1 Fifth Annual Report of the Manitoba Government Telephones 
for the fiscal year ending November 30th, 1912, p. 3. (This is the 
first annual report of the Government telephone system which was 

US 



n6 GOVERNMENT TELEPHONES 

as to produce the quick results demanded by the 
political situation, or, in other words, so as to enable 
the Government to make immediate political capital 
out of an alleged telephone " reform." 2 Although 
it appears from the contemporary Opposition press 
that Mr. Barry did not actually assume charge of the 
system until July 16th, 3 yet so well did he fulfill the 
requirements of speed that on August 16th, exactly 
one month later, the work of reorganization was 
completed and he was able to resign. 4 There is con- 
siderable doubt, however, as to what took place un- 
der the reorganization; the details given in the an- 
nual report of the system for the fiscal year 19 12 
were couched in such ambiguous political phraseology 
and were so palpably contradictory as to be prac- 
tically meaningless. Nevertheless, even from super- 
ficial analysis of the official reports it is clear that the 
political principle of " reform for reform's sake n 
was carried out in many ways, that changes in form 
took place rather than changes in substance ; and, al- 
though it is probable that some beneficial changes 
were effected — especially in the methods of pur- 
chasing and of handling supplies — the conclusion is 

issued as a separate document in addition to being printed among 
the Sessional Papers.) 

2 By the appointment of the investigator as the administrator, the 
Government adopted a not unusual political method of assuaging 
popular discontent and distrust. 

3 Cf. the Manitoba Free Press, Winnipeg, July 4, 1912. 

4 Fifth Annual Report of the Manitoba Government Telephones 
for the fiscal year ending November 30th, IQI2, p. 3. 



REORGANIZED 117 

inevitable that the reorganization was largely nom- 
inal The cost of the " reorganization " ($14,- 
600), though, was by no means nominal. 5 

The result of the " reorganization " is stated to 
have been the immediate diminution of unit operat- 
ing costs. 6 As a matter of fact, however, the ex- 
istence of a relationship of cause and effect between 
the " reorganization " and the reduction of costs is 
not established. That expenses were somewhat re- 
duced is clear; but the reduction was to a large ex- 
tent a purely political move on the part of the Gov- 
ernment, who produced it by temporarily sacrificing 
some of the influence which it and its political 
adherents had been accustomed to exert. Further- 
more, the " reorganization " developed a good deal 
of friction among the employees, with the result that 
a large number of employees holding executive posi- 
tions resigned; and the Government took advantage 
of the opportunity and effected appreciable econ- 
omies by reducing the salaries attached to these su- 
perior positions, — a practice which is by no means 
infrequent in Government departments. 

Upon the resignation of Mr. Barry (August 16, 
19 1 2), Mr. George A. Watson of Minneapolis was 
appointed Commissioner of Telephones and the sys- 
tem was placed under the supervision of an Advisory 

5 Fifth Annual Report of the Manitoba Government Telephones 
for the fiscal year ending November 30th, IQI2, p. 12, 

6 Ibid., p. 4. 



n8 GOVERNMENT TELEPHONES 

Board of which Mr. H. A. Robson, K. C, the Pub- 
lic Utilities Commissioner (a Public Utilities Com- 
mission having been created in April 1912) 7 was a 
member. The effect of this change was to give the 
Commissioner of Telephones considerably more inde- 
pendent executive power than the original Telephone 
Commission had ever been allowed to exercise, while 
the conspicuous supervisory powers (for example, 
in regard to rates and depreciation charges) were 
transferred from the Minister of Telephones and 
Telegraphs to the Public Utilities Commissioner. 8 
However, the Government continued to retain the 
inconspicuous supervisory power, that is, the power 
to exert influence in subtle and obscure ways to make 
use of the telephone system for political purposes; 
indeed, unless some concrete political advantage could 
be derived from the system, the Government would 
have regarded the enterprise as a total loss politically 
— as a political liability rather than as a political 
asset. Nevertheless, in consequence of this change, 
an appreciable improvement may be assumed to have 
taken place in the relations between the telephone 
system and the Government; it is certain that the 
feverish energy of ineconomical expansion for politi- 
cal ends was checked. But it must be emphasized 

7 Journals of the Legislative Assembly of Manitoba, Session 1912, 
p. 175. 

8 Cf . An Act respecting Public Utilities, to create a Public Utility 
Commission and to prescribe its Powers and Duties. The Revised 
Statutes of Manitoba, 1913 , vol. iii, Chap. 166. 



REORGANIZED 119 

that this improvement did not represent any delib- 
erate attempt on the part of the Government toward 
a belated fulfillment of their promise of commercial 
management; on the contrary, it was solely a conces- 
sion to public opinion, a concession forced by the 
Government's fear of the political consequences of 
further reckless expenditure and brazen mismanage- 
ment and granted only to a degree which was cal- 
culated to appease public opinion. Moreover, it is 
highly significant that the improved conditions were 
largely due to the ability and integrity of the Public 
Utilities Commissioner, whose personal character 
and career inspired the public with confidence. In 
other words, here is really excellent evidence of the 
fact that, in the conduct of public utilities, an impar- 
tial and efficient regulatory tribunal — or even indi- 
vidual — secures results which it is impossible to at- 
tain under any system of unregulated political con- 
trol. 

EXCHANGE RATES INCREASED; PRIVATE TELE- 
PHONE COMPETITION PREVENTED 

By their tactics — by the appointment of the in- 
vestigating Commission, by the resignation of the 
original Telephone Commission and by the widely 
advertised " reorganization " of the system — the 
Government succeeded in their purpose of allaying 
public indignation. 9 Consequently, during the suc- 

9 This result was also partly due to the fact that the wrath of the 



120 GOVERNMENT TELEPHONES 

ceeding years there is relatively little documentary 
evidence as to the inside workings of the system; in- 
deed, practically the sole black and white informa- 
tion consists of the brief annual reports of the Tele- 
phone Commissioner. Moreover, these reports of- 
fer little assistance to the analytical investigator, for 
they are essentially political documents ; and the Gov- 
ernment met attempts to go behind the published 
returns with reluctance and with evasion, — the best 
possible evidence that all the workings of the system 
were not able to stand the light of day. 

It will be recalled that the proposed rate schedule 
which had been prepared by the Telephone Commis- 
sion in December 191 1, and which was based largely 
on measured service, had been quietly killed by the 
Government. 10 The need for increased revenue, 
however, survived; every day which passed under 
the existing rates meant a further step toward actual 
bankruptcy. While the investigation was in progress 
the Government lacked the audacity to submit an- 
other rate increase to the public; but the investigation 
having been completed and a " reorganization " of 
the system having been announced, the time was 
politically ripe for effecting a general increase of 
rates. The suitability of the occasion was not lost 
upon the politicians in the Government and on July 

public had been diverted from telephones and had been directed 
against the Government's maladministration of the publicly-owned 
grain elevators. 
10 Cf. p. 100, supra. 



REORGANIZED 121 

25, 1912, the Telephone Commissioner, having 
secured the necessary approval of the Public Utilities 
Commissioner, issued a new schedule of rates appli- 
cable to Winnipeg. On August 13th a new schedule 
of rates applicable to the rest of the Province was 
issued. 11 

These new schedules provided flat (unlimited 
service) rates only — apparently the politicians 
wanted nothing further to do with measured rates, 
however equitable such rates might be. In Winni- 
peg, the rate for individual line, business service (the 
only class of business service which the new Winni- 
peg schedule offered) was raised from $50 to $60 per 
year, an increase of 20 per cent.; the rate for indi- 
vidual line, residence service was raised from $25 
to $30 per year, an increase of 20 per cent; and the 
rate for two-party line, residence service was raised 
from $18 to $25 per year, an increase of 39 per cent. 
In the smaller towns and in the rural districts, the 
increases ranged up to 67 per cent. Even the Gov- 
ernment press admitted that the new rates involved 
" considerable " increases! 12 

The new schedules showed an arbitrary treatment 
of the consumer which was truly Governmental. In 
the first place, the recommendations both of the Win- 

11 First Report of the Public Utilities Commissioner Manitoba for 
the Six Months ending November 30th, 1912. Sessional Paper No. 
11. Sessional Papers. Legislative Assembly of Manitoba. Session 
1913, PP. 546-556. 

12 The Winnipeg Telegram, July 19, 1912. 



122 GOVERNMENT TELEPHONES 

nipeg Industrial Bureau and of the Board of Trade 13 
were silently ignored. In the second place, the 
schedules, approved and promulgated on July 25th 
and on August 13th, were retroactive, becoming ef- 
fective as from July 1st. About the 10th of July 
telephone subscribers received the following circular : 

"A bill has recently been sent you for telephone rentals. 
No rates have as yet been approved by the public utilities 
commissioner. A new bill will be sent you in a few days." 14 

During the first half of July, in spite of the fact that 
bills had been rendered, subscribers w T ere in absolute 
ignorance as to how much their telephone service was 
costing them. 

Contemporary press reports throw another inter- 
esting and significant side-light on the new rates. It 
appears that, immediately after these rates were an- 
nounced to the public, a private power company ap- 
plied to the City Council of Winnipeg for permis- 
sion to install and to operate a telephone system in 
that city, the representative of the company declar- 
ing that " the matter of rates had been fully con- 
sidered " and that " the company had decided that it 
could give private residence service at $20 per year 
and a general business service at $40 per year." 15 
In other words, the company offered to cut the Gov- 
ernment rates by one-third. Nevertheless, when the 

13 Cf. pp. 93-94, supra. 

14 The Manitoba Free Press, Winnipeg, July 13, 1912. 

15 Cf. the Manitoba Free Press, Winnipeg, July 23, 1912. 



REORGANIZED 123 

company's application was referred to the Works 
Committee, that body, although conceding the merits 
of the proposal, denied the application on the ground 
that " it would be poor business for the citizens of 
Manitoba to allow a new company to come in to com- 
pete with the government telephones." 16 As the 
citizens of Manitoba are the proprietors of the Pro- 
vincial telephone system, it certainly would have been 
11 poor business " for them to have had to enter into 
competition with any system which showed prospects 
of being efficiently and economically constructed and 
operated! 

A recommendation contained in the Telephone 
Commissioner's report on the " reorganization " of 
the system, submitted in August 19 12, also deserves 
attention. According to the newspapers, " it was 
recommended in the commissioner's report that the 
construction work be let out on contract." 17 Being 
interpreted, this recommendation is an open admis- 
sion that the Government could secure economy by 
turning their construction work over to private en- 
terprise. 18 

16 The Winnipeg Telegram, October 5, 1912. 

17 The Manitoba Free Press, Winnipeg, August 24, 1912. 

18 It is interesting to note that the annual report of the Postmaster 
General of the United States for the fiscal year ended June 30, 19 14, 
contains a similar recommendation. In this report Mr. Burleson 
stated: "There can be no question as to the one outstanding, self- 
evident fact that the identical service to rural mail patrons can be 
maintained at this time with a saving of from $15,000,000 to $20,000,- 
000 per annum, and it is earnestly recommended that the necessary 
legislation for placing all Rural Delivery Service on a contract basis 



i2 4 GOVERNMENT TELEPHONES 

TELEPHONE ACCOUNTS STILL DEFECTIVE; A REAL 
LOSS OF OVER $200,000 IN I912 

In 19 1 2 the fiscal year for Provincial Government 
departments was changed to close, in that year and 
thereafter, on November 30th, instead of December 
31st. The published telephone accounts for 19 12 19 
therefore covered only eleven months, a period which 
included six months under the original Commission 
and five months under the " reorganized " adminis- 
tration. The accounts were checked and summar- 
ized by the firm of chartered accountants who had 
been appointed as auditors and, as might be expected, 
were much more complete and intelligible than those 
in former years. For instance, it was immediately 
noticeable that current expenses for the first time 
included a depreciation charge; for the Government 
had realized that they could no longer with impunity 
violate sound accounting principles as to depreciation 
and had acceded to the insistent demands of the Pub- 
lic Utilities Commissioner and of the auditors that a 
reserve to meet reconstruction expenses be set aside 
from each year's revenue beginning with 19 12. 
Consequently, the accounts for the first time also 

be enacted in order that the people may receive the maximum return 
for the minimum expenditure of their money." Needless to say, 
Congress refused to enact the " necessary legislation " which would 
thus enable the United States Post Office Department to save from 
$15,000,000 to $20,000,000 per year — on a single branch of the 
postal service — by utilizing the efficiency of private labor. 

19 Fifth Annual Report of the Manitoba Government Telephones 
for the fiscal year ending November 30th, IQI2, pp. 6-14. 



REORGANIZED 125 

showed maintenance expenses as a separate item, all 
reconstruction expenses during the fiscal year having 
been properly met from the depreciation reserve 
which had been set aside during the year. 20 

In spite of this improvement in accounting 
methods, however, it is still impossible to discover 
the real financial outcome of the year's business from 
the published accounts. The accounts showed a 
11 balance " of revenue of $366,148; but interest 
charges upon telephone capital were again omitted. 
Moreover, although the accounts conformed to sound 
accounting principles in that a depreciation charge 
was included in current expenses, yet the amount of 
the charge ($126,000) failed to conform to the re- 
quirements of the best engineering experience and 
was quite inadequate to provide a sufficient reserve 
against accrued depreciation, — a fact which was 
pointed out by the auditors 21 and admitted by the 
Telephone Commissioner. 22 Consequently, it is 
necessary to recast the accounts by increasing the de- 
preciation charge to a sum sufficient to provide an 
adequate reserve; with such a depreciation charge 
and with the inclusion of interest charges, the ac- 
counts for the eleven months are as follows: 

20 Incidentally, it will be noted that the method of dealing with 
reconstruction expenses in the accounts which has now been adopted 
by the Government is precisely the method which has been used here 
in recasting the telephone accounts in the preceding years. Cf. pp. 
54-57, supra. 

21 Fifth Annual Report of the Manitoba Government Telephones 
for the fiscal year ending November 30th, 1912, p. 13. 

22 Ibid., p. 6. 



126 GOVERNMENT TELEPHONES 

Gross Revenue $1,352,876 

Expenses : 

Operation $584,823 

Maintenance 275,905 

Depreciation 405,891* 

Total Expenses .... 1,266,619 

Net Earnings . . 86,257 

Interest 3I4>7°5 23 

Deficit $228,448 

* Equivalent to 6% of plant cost at the end of the preceding year; 
adjusted to cover eleven months only. 

It is clear, then, that the system was actually 
worked at a greater loss during the fiscal year 19 12 
than during the calendar year of 191 1. But even 
this result is too favorable, for it will be noted that 
the interest charges in 19 12 were considerably less 
than those in the preceding year : owing to the change 
in the date of the closing of the fiscal year, the Public 
Accounts included only six months' interest upon a 
considerable amount of the Provincial bonded in- 
debtedness incurred for telephone purposes. 24 If 
the interest charges had represented the whole 
amount of interest accrued upon all telephone cap- 
ital during the eleven months included in the fiscal 
year, the above deficit would have been increased by 
a sum of about $50,000. Thus the accounts offered 
the mulcted taxpayer little hope of relief; but since 

23 Sessional Papers, Legislative Assembly of Manitoba. Session 
1913, p. 62. 

24 Ibid. 



REORGANIZED 127 

the increased rates had been in force only during 
less than one-half (five months) of the fiscal period, 
the full effect of the increase could not be expected 
until the next year, the first complete year under the 
new administration. 

INADEQUATE PROVISION AGAINST DEPRECIATION; 

REAL FINANCIAL RESULT IN 1913 AGAIN 

A DEFICIT 

The telephone accounts for the next year, 25 the 
twelve months ended November 30, 19 13, were 
the most comprehensive accounts published up till 
that time, and they reflected the beneficial influence 
of the Public Utilities Commissioner. Interest 
charges were included for the first time and the de- 
preciation charge was increased to $373,431 — with 
the result that the accounts, instead of showing a 
huge credit " balance " as in former years, showed a 
" surplus " of only $30,265, of which $26,691 was 
set aside as an additional reserve against deprecia- 
tion, leaving a credit balance of only $3,574. The 
depreciation charge was equivalent to the estimated 
loss in value due to the depreciation during the year 
of the plant at the end of the preceding year, the 
estimate of this loss in value being based upon a cal- 
culation of the " average life, plus cost of removal, 
less salvage " of each of the principal kinds of tele- 

25 Sixth Annual Report of Manitoba Government Telephones for 
the fiscal year ending November 30th, 1913, pp. 8-15. 



128 GOVERNMENT TELEPHONES 

phone plant. 20 This calculation of the average life 
of the various kinds of plant, however, was palpably 
erroneous and unscientific; for instance, all buildings 
were entirely omitted from the calculation — al- 
though buildings are subject to deterioration like 
other kinds of plant — and the average life of rural 
pole lines was placed at twenty years despite the 
abnormal deterioration to which such lines are sub- 
ject in view of the " extraordinary weather condi- 
tions " 27 in Manitoba. The result was that the de- 
preciation charge was equivalent to only 4.2% of 
the book value of the total plant, 28 or to only 4.8% 
of the actual plant cost, i. e. excluding the cost of in- 
tangibles and the maintenance expenses improperly 
charged to capital. 29 It is clear, therefore, that this 
charge was again inadequate. 30 When an adequate 

26 Report of the Public Utilities Commission for the fiscal year 
ending 30th November, 1913. Sessional Paper No. 24. Sessional 
Papers. Legislative Assembly of Manitoba. Session 1914, p. 822. 

27 Seventh Annual Report of the Manitoba Government Tele- 
phones for the fiscal year ending November 30th, 1914, p. 14. 

28 The charge was equivalent to 4.91% of the book value of such 
plant as was taken into consideration in determining the charge. 

29 It will be recalled that the cost of intangibles and the amount 
of the maintenance expenses charged to capital was determined by 
a subsequent appraisal of the plant made in 1915. Cf. p. 54, supra. 

30 Although the Public Utilities Commissioner approved the 
amount of the depreciation charge, yet he was not in a position to 
express an opinion as to its adequacy. Even assuming that he had 
an independent staff of telephone engineers to advise him, which he 
had not, there could be no indication of the adequacy of any depre- 
ciation charge so long as such a charge was based, not upon the 
plant cost, but upon the book value of the plant, since the book 
value of the plant included the cost of intangibles and the main- 
tenance expenses improperly charged to capital during the first 



REORGANIZED 129 

reserve against depreciation is provided, the accounts 
reveal the following result: 

Gross Revenue $1,707,150 

Expenses : 

Operation $598,637 

Maintenance 297,842 

Depreciation 465,538* 

Total Expenses .... 1,362,017 

Net Earnings 345,133 

Interest 406,975 

Deficit $61,842 

* Equivalent to 6% of plant cost at the end of the preceding year. 

Although the real financial result of the fiscal year 
19 13 was thus a loss of at least $60,000, neverthe- 
less this result was a great improvement over the re- 
sults in 191 1 and 19 12. It is certain, however, that 
this improvement was due almost solely to the in- 
crease in exchange rates ; it will be recalled that the 
new rate schedule involved increases of 20 per cent. 
and upwards and thus probably brought an increase 
in gross revenue of approximately $200,000 per year. 
Indeed, the gross revenue from exchange service dur- 
ing the year averaged $31.75 per telephone, or more 
than the corresponding average revenue received in 
19 13 by the entire Bell Telephone System in the 
United States, with its many huge exchanges ! 31 

three years of Government operation. It is also significant that 
practically all of the year's " surplus " was set aside as an addi- 
tional reserve against depreciation. 

31 Annual Report of the Directors of American Telephone and 



130 GOVERNMENT TELEPHONES 

While it is true that a number of operating and 
administrative economies were effected during the 
year, some of these economies were in reality more 
detrimental than beneficial to the service. This was 
especially true in regard to the economies in salaries 
and wages resulting from the Government's policy of 
employing cheap labor. 32 Although the adoption of 
this policy was possibly due to the fact that such 
economies were the most obvious and the least dan- 
gerous politically, nevertheless it cannot be denied 
that it has always been difficult to convince the rural 
voter that any man is worth a salary of more than 
$2,000 a year. Consequently, although the Public 
Utilities Commissioner found the system in need of 
technical assistance of a high order, he was forced to 
take the position that the expenses of the employ- 
ment of experts should be saved. 83 It is true, as in- 
dicated in the Annual Report, 34 that some increases 
in employes' wages, especially as regards the schedule 
of operators' wages, were granted in 1913 ; but these 
increases were largely the result of pressure by labor 

Telegraph Company to the Stockholders for the year ending Decem- 
ber 31 ', 191 3 y P. 13- 

32 For example, as has already been pointed out, the Government 
endeavored to economize by reducing the salaries attached to supe- 
rior positions. Cf. p. 117, supra. 

33 First Report of the Public Utilities Commissioner Manitoba for 
the Six Months ending November 30th, 1912. Sessional Paper No. 
11. Sessional Papers. Legislative Assembly of Manitoba. Ses- 
sion IQ13, p. 481. 

34 Sixth Annual Report of the Manitoba Government Telephones 
for the fiscal year ending November 30th, 1913, p. 2. 



REORGANIZED 131 

organizations and by no means eliminated wage dis- 
satisfaction. 

QUALITY OF SERVICE UNSATISFACTORY 

The Annual Report for 19 13 contained one fea- 
ture which will probably be continued in future re- 
ports, namely, an attempt to prove by statistics that 
— no matter what the experience of the subscribers 
may have been — the service is increasingly satis- 
factory. For instance, the Report for 19 13 stated: 

" Throughout the Province, exclusive of Winni- 
peg, 4,413 subscribers were personally interviewed 
or called up during the year, with results as follows : 

83. per cent, reported service satisfactory; 
10.6 per cent, reported service fair; 
6.4 per cent, reported service unsatisfactory." 35 

On its face this statement has a wholesome ring, even 
though it admits that in spite of the " reorganiza- 
tion " of the system the Government had succeeded 
in satisfying only 83 out of every 100 customers, cer- 
tainly not an enviable commercial record! As a 
matter of fact, however, the statement is a mere po- 
litical device for disarming obnoxious criticism. 
Other Governments have availed themselves of the 
ingenuousness of statements of this character for 
similar purposes. 

After the British Post Office at the end of 191 1 

35 Sixth Annual Report of the Manitoba Government Telephones 
for the fiscal year ending November 30th, 1913, p. 2. 



132 GOVERNMENT TELEPHONES 

had acquired a monopoly of the telephone business 
in the United Kingdom by purchasing the plant of 
the National Telephone Company, the public con- 
tinually complained that the service as operated by 
the Government was inferior to that formerly fur- 
nished by the Company. In replying to some of 
these complaints, in the House of Commons on July 
3, 19 14, the Postmaster General stated that the Post 
Office had sent out inquiries to 135,000 out of 209,- 
000 subscribers in London, with the result that 87 
per cent, stated that they were perfectly satisfied 
with the service they were receiving from the Govern- 
ment. 36 Upon investigation by still skeptical critics 
and customers, however, it was revealed that the 
" inquiry " of the Post Office had consisted merely of 
asking the subscriber if his line were working all 
right, whereupon those subscribers whose lines were 
not at that particular moment out of order naturally 
responded in the affirmative, and were recorded as 
finding the service satisfactory. 37 

It is clear that any inquiry of this nature offers 
countless opportunities for manipulation, to the end 
that the results secured may be favorable to the con- 
tentions of the persons conducting the inquiry; and 
unless the good faith and the impartiality of the in- 
quiry is assured, the results are meaningless. In 
the case of the Manitoba Government system, the 

36 Parliamentary Debates. House of Commons. Friday, 3rd 
July, 1914. Official Report. Column 773. 

37 The Morning Post, London, July 13, 1914. 



REORGANIZED 133 

above statistical statement of satisfactory service 
must be read in the light of a record of some of the 
11 irregularities " experienced by the Public Utilities 
Commissioner with the telephone (Main 3024) in 
his own office. This record was so significant that 
it was published in the Report of the Public Utilities 
Commission for the fiscal year 19 13 under the head- 
ing of " Partial Record of Telephone." The Com- 
missioner's illuminating experience follows: 

11 August 21, 19 13. — Main 3034 asked for three 
times; telephone rang and I was asked what number 
I wanted; went to telephone on call three times, party 
had been asking for number of National Transcon- 
tinental, and was told it was M. 3024. 

11 August 22, 19 13. — Main 3014 asked for. 

4 ' August 26, 1913. — Main 3034 wanted; called 
Main 3024. 

11 September 1, 1913. — 'Phone rang; no one on 
the line. 

" September -2, 1913. — McMillan's (M. 3034) 
'phone again; ditto twice. 

" September 4, 1913. — Call for M. 3025. 

" September 10, 19 13. — Twice called for wrong 
'phone; once M. 2034, once M. 3034. 

" September 11, 19 13. — Called for Main 3034. 

"September 29, 1913. — 'Phone rang, no one 
there. 

11 September 30, 19 13. — Cut off in the middle of 
conversation with Mr. 



i 3 4 GOVERNMENT TELEPHONES 

" October I, 1913. — Called for wrong number, 
M- 3034; ditto; asked for M. 8091 ; asked for Mc- 
Millan's number, M. 3034; wrong number, some 
person wanted M. 4034; wrong number given 
again. 

" October 6, 1913. — Called for Mr. Wright; 
called for Standard Trust. 

" October 8, 1913. — 'Is Mr. Elliott there?' 

" October 9, 1913.— * Is that Clark's?' 'Is 
that McMillan's? ' M. 3034 called. 

"October 16, 1913. — Twice rang for nothing. 
' Is that M. 3034? ' ' Is that Clark & Co.? ' 

"October 21, 1913. — M. 3034 wanted. 

"October 23, 1913. — M. 3034 wanted. 

" October 24, 1913. — ■- Called for M. 3824; called 
for M. 3034. 

"October 27, 1913. — Called for M. 3025; 
called for M. 3034. 

"October 28, 1913. — Called for Clark's; ditto. 

"October 29, 1913. — Called for wrong 'phone. 

" November 10, 19 13. — Bell rang twice; girls say 
'Number?' 

" November 11, 19 13. — Called for M. 3034. 

" November 14, 1913. — ' Is that Clark's? ' 

" November 18, 19 13. — Called for M. 3034. 

" November 19, 1913. — Asked for M. 3034. 

"November 22, 1913. — Called for M. 3034; 
called for M. 3025; called for McMillan's. 

"November 24, 1913. — -Called for Mr. Miller. 



REORGANIZED 135 

" November 25, 1913. — ' Is that Clark's? ' (M. 
8024). 

" November 28, 19 13.— Called for M. 3034. 

" November 29, 1913. — Called for M. 3034. 

" December 8, 19 13. — -Twice called for McMil- 
lan's (M. 3024); once for J. D. Clark's (M. 
8024). 

" December 13, 1913. — Called for McMillan's; 
I asked for Sher. 1489, got the Winnipeg Brewery; 
called for M. 3034. 

" December 15, 1913.— Asked for Sher. 1489 
and got wrong number ; then when got the right num- 
ber cut off in conversation. 

" December 22, 1913. — Twice called for M. 

3034- 

" December 23, 1913. — Called for M. 3034. 

" December 27, 1913. — Called for M. 3034. 

" December 30, 1913. — Called for M. 3025. 

"December 31, 1913. — Called for M. 3034. 

"January 2, 1914. — Called for M. 3034; called 
for M. 3034. 

" January 7, 19 14. — Bell rang, no call. 

" January 10, 19 14. — Called for M. 3034. 

"January 12, 1914. — Called for M. 3014. 

"January 12, 1914. — Called for M. 3034. 

" January 14, 19 14.— Called for M. 3025." 3S 

38 Report of the Public Utilities Commission for the fiscal year 
ending 30th November, 1913- Sessional Paper No. 24. Sessional 
Papers. Legislative Assembly of Manitoba. Session 1914, p. 839. 



136 GOVERNMENT TELEPHONES 

MORE ADMINISTRATIVE REFORMS, WITH EXTENSION 

OF GOVERNMENT CONTROL; ACCOUNTS SHEW 

ANOTHER DEFICIT IN 1914 AND IMPROPER 

USE OF TELEPHONE FUNDS 

The following year, the fiscal year ended Novem- 
ber 30, 1 9 14, was the seventh year of Government 
ownership and operation of telephones. It also 
marked the beginning of a period of depression. 
The crop of 19 13 in the prairie Provinces had been 
unsatisfactory, immigration had fallen oft* and even 
the towns had begun to react after the decade of 
prosperity they had experienced. The harvest of 
19 14 was again short, immigration practically ceased, 
and in xAugust the outbreak of the war found Man- 
itoba in a precarious financial condition. The Pro- 
vincial Government had exercised their borrowing 
powers freely, there had been continuous speculation 
in both rural and urban land for several years and 
the anticipated expansion of production had not 
taken place. The new transcontinental railroad lines 
were approaching completion and the stimulus to 
trade which the construction period had involved, 
had passed away. There would undoubtedly have 
been a period of depression in the Northwest, even 
if the war had not taken place. 39 

The Annual Report of the Government Tele- 
phones for the fiscal year was not issued until August 

39 Cf. The Canada Year Book 1914, Ottawa 191 5. 



REORGANIZED 137 

19 1 5. Although the Report made no mention of 
any proposed administrative change, the Report of 
the Public Utilities Commission showed that further 
reorganization of the system was contemplated. In 
the latter Report the Public Utilities Commissioner 
wrote : " The present telephone management hav- 
ing reached a stage of operation at which it seems 
advantageous to do so, there is being formulated a 
code of organization such as is in use in large tele- 
phone enterprises, but adapted to these conditions. 
This is for the guidance of the higher officials and to 
systematize the work." 40 Although this statement 
gives no indication of the nature of the reorganiza- 
tion to be effected, it is clear that the administration 
of the system has been in a state of constant change, 
— a condition which in itself must have precluded 
efficiency. 

In regard to the telephone accounts for the year, 41 
it is immediately noticeable that the endorsement of 
the chartered accountants who had audited the ac- 
counts for 19 1 2 and 19 13 is lacking. In the An- 
nual Report of the Government Telephones no ex- 
planation is offered as to this apparent absence of 
audit; the reason, however, is given in the following 
extract from the Report of the Public Utilities Com- 

40 Third Annual Report of the Manitoba Public Utilities Com- 
mission for the year ending November 30th, IQI4, p. 4. 

41 Seventh Annual Report of the Manitoba Government Tele- 
phones for the fiscal year ending November 30th, IQ14, pp. 3-4, 
14-19. 



138 GOVERNMENT TELEPHONES 

missioner: " The method of reporting the audit, 
both monthly and annually, was changed in 19 14. 
Until recently the auditors reported to the Commis- 
sioner of Telephones, and held their appointments 
from him. It was decided that that appointment 
should be by the Government, and the monthly and 
annual reports made to the Provincial Treasurer. 
That course is now being followed." 42 In other 
words, the Government had taken back much of the 
control over the telephone finances which it had been 
necessary for it to yield at the time of the " reorgan- 
ization " in 1912: the reports and recommendations 
of the auditors could easily be ignored or suppressed. 
Although the power which the Government had been 
obliged to surrender in 19 12 was, all things consid- 
ered, not very great (for the power to exert influ- 
ence for political purposes they had never given up) , 
nevertheless no further evidence is necessary to prove 
that the Government had begun to manoeuvre with 
the object of ultimately recovering every possible 
vestige of the power over the system which had been 
theirs during the first four years of Government 
operation. 

Except for the absence of the auditors' certificate, 
the accounts for 19 14 were similar in form to those 
for 19 13 — and they showed about the same result. 
After the deduction of interest charges and a depre- 

42 Third Annual Report of the Manitoba Public Utilities Com- 
mission for the fiscal year ending November 30th, IQI4, p. 4. 



REORGANIZED 139 

ciation charge of $409,536, there was a " surplus " 
of $56,067, of which $54,824 was set aside as an 
additional reserve against depreciation, leaving a 
credit " balance " of $1,243. The depreciation 
charge, too, was based upon precisely the same er- 
roneous and unscientific calculations as in 1913 43 
and, being equivalent to only 4.8% of the plant cost 
at the end of the preceding year, was inadequate to 
precisely the same degree. When the depreciation 
charge is increased to an amount sufficient to pro- 
vide an adequate contribution to the depreciation re- 
serve, the accounts stand thus: 

Gross Revenue $1,824,115 

Expenses : 

Operation $621,033 

Maintenance 3 X 5>797 

Depreciation 509,179* 

Total Expenses 1,446,009 

Net Earnings 378,106 

Interest 421,682 

Deficit $43,576 

* Equivalent to 6% of plant cost at the end of the preceding year. 

Although this loss of at least $40,000 was — un- 
fortunately for the taxpayer — highly unsatisfac- 
tory, yet it was a slight improvement over the result 
in 19 13. However, inasmuch as gross revenue from 
exchange service during the year increased to an 
average of $32.00 per telephone, it is apparent that 

43 Cf. pp. 127-128, supra. 



140 GOVERNMENT TELEPHONES 

the financial improvement was again due, not to 
economies or efficiencies in operation, but almost 
solely to increased revenue secured from subscribers. 
Since, however, the average revenue from exchange 
service is already at the maximum possible under the 
present rates, the evidences of Governmental ex- 
travagance and inefficiency which are revealed upon 
a close examination of the accounts cannot much 
longer be concealed from the public unless there is 
another substantial increase in rates. In the future, 
analysis of the accounts may be expected to show 
that the system is actually losing more and more each 
year. 

One statement in the Annual Report for 19 14 is 
highly significant. Referring to reconstruction ex- 
penses, the Telephone Commissioner wrote : " As 
the age of the telephone plant is extended it will be 
found that the expenditure on account of renewals 
and reconstruction of the plant, due to extraordinary 
weather conditions, obsolescence and inadequacy, will 
increase accordingly." 44 These words give what- 
ever confirmation is needed of the existence of ex- 
traordinary weather conditions, that is, conditions 
which should properly require extraordinary de- 
preciation reserves. The statement also implies that 
extraordinary depreciation should have been pro- 
vided for year by year and an adequate reserve built 

A4s Seventh Annual Report of the Manitoba Government Tele- 
phones for the fiscal year ending November 30th, IQI4, p. 14. 



REORGANIZED 141 

up to meet it. This policy was of course not 
adopted nor is it adopted now. In view of these 
conditions there can be no question that an annual 
depreciation charge equivalent to 6 per cent, of plant 
cost at the end of the preceding year is certainly a 
distinctly moderate provision against reconstruction 
requirements. Indeed, a sound policy in respect to 
extraordinary depreciation due to the climatic con- 
ditions of Manitoba would demand an increase in 
the annual depreciation charge over and above 6 
per cent. An annual depreciation charge of 6 per 
cent, has been used here in recasting the accounts 
merely to avoid even the appearance of an exaggera- 
tion of the real losses of the Government system. 
Since the plant costs upon which the depreciation 
charges have been based have also been understated 
rather than overstated, 45 there can therefore be no 
question that the aggregate losses during the seven 
years of Government operation were at least $650,- 
000. These losses, too, were incurred from a sys- 
tem which included fewer telephones than there are 
in either of the single cities of Toronto, Ontario, 46 or 
Milwaukee, Wisconsin. 47 

According to the Annual Report, the unexpended 
depreciation reserves deposited with the Provincial 
Treasurer at the end of 19 14 amounted to the sum 

45 Cf. pp. 152-154, infra. 

46 The Toronto World, January 9, 1916. 

47 The Milwaukee Sentinel, June 17, 19 15. 



i 4 2 GOVERNMENT TELEPHONES 

°f $73 I >5 I 5- 48 Now, although this sum was an ab- 
surdly inadequate reserve, nevertheless it had been 
large enough to attract the attention of the members 
of the Government. It seems that the total of the 
trust funds (which included the unexpended deprecia- 
tion reserves of the telephone system) in the hands 
of the Government at November 30, 19 14, was $1,- 
514,231.77 in nominal cash, but that only $150,529 
of these funds was in actual cash. 49 In order to con- 
ceal this discrepancy between nominal cash and actual 
cash it further appears that the Government bor- 
rowed from the bank, by means of an overdraft, the 
balance between these two sums, viz., $1,363,702.- 
77. 50 This transaction was clearly a piece of " win- 
dow dressing," the plain fact being that the trust 
funds, including the telephone reserves, had been 
used for the current expenses of the Province. 

In any discussion of the finances of the Manitoba 
telephone system, considerable emphasis must be laid 
on the far-reaching effects, especially in a period of 
depression, of the existence of this burdensome Gov- 
ernment ownership and operation instead of efficient 
private operation constantly contributing to the pub- 
lic purse in the form of taxes. 

There can be no doubt that the addition to the 

48 Seventh Annual Report of the Manitoba Government Tele- 
pones for the fiscal year ending November 30th, 1914, p. 14. 

49 Sessional Paper No. 1. Sessional Papers. Legislative Ass em- 
bly of Manitoba. Session 1915, pp. 8 and 17. 

50 Ibid., p. 5. Cf. also the Manitoba Free Press, Winnipeg, Feb- 
ruary 25, 1915. 



REORGANIZED 143 

Provincial debt of the indebtedness incurred for tel- 
ephone purposes and the extravagant way in which 
the telephone funds have been expended, have 
seriously compromised the credit of the Province. 
This result would have occurred even in normal 
times, traces of it were noticeable prior to 19 14. 
The ultimate reactions of the financial difficulties into 
which the Province has fallen as a result of experi- 
ments in public ownership, can only be a matter for 
conjecture; but in any case, it would appear that the 
progress of Manitoba must be seriously retarded, 
while during the immediate future the Province will 
be unable to extend its governmental activities even 
in advisable directions, will be forced to curtail ex- 
penditure on telephone construction still more, and 
may be involved in difficulty in procuring funds for 
other necessary and urgent purposes. 51 

THE TELEPHONE MANAGEMENT A CAMPAIGN ISSUE; 

EXTENSION OF TELEPHONE SERVICE LESS THAN 

THAT IN THE UNITED STATES; THE 

PASSING OF THE GOVERNMENT 

The summer of 19 14 saw a closely contested gen- 
eral election and in the bitter campaign which pre- 
ceded it, the management of the telephone system 
was one of the chief bones of contention, as was to 
be expected. The Opposition raked the entire his- 
tory of the enterprise over the coals, illuminating 

51 Cf. p. 32, supra. 



i 4 4 GOVERNMENT TELEPHONES 

with perfervid invective the painful contrast between 
promise and performance. " The people of Man- 
itoba/' cried the Opposition, " are not getting as 
promised a better service at half the rates charged 
by the Bell. The prices have been increased very 
considerably. The inability of the Government to 
keep its pledges ... is the result chiefly of over- 
capitalization . . . wasteful construction methods 
and inefficient administration, the direct consequence 
of persistent manipulation of the system in the inter- 
est of the Government machine." 52 The Opposition 
press was filled with varied charges of political ma- 
nipulation, favoritism, incompetence and graft in 
the administration of the system; particularly bitter 
was the charge that the Government were making 
use of the system in every w r ay (for example, by hav- 
ing employees working at a distance transported to 
their respective polling places at the expense of the 
Province 53 ) in order to "swing" the election to 
their own party. 

In view of the fact that irrefutable proof of the 
accuracy of many of the charges of the Opposition 
was public property, the Government candidates were 
hard pressed for adequate rebuttal. Indeed, in a 
number of instances they more or less frankly ad- 
mitted that the Government had made " mistakes " 
in their telephone policy and were unable to fulfill 

52 Liberal Handbook 1914, p. 94. 

53 Cf. the Manitoba Free Press, Winnipeg, July 2, 19 14. 



REORGANIZED 145 

their promises. 54 Other candidates spoke vaguely 
about " splendid " service and expatiated upon the 
theoretical advantages of public ownership as com- 
pared \Vith alleged " extortions " of private cap- 
ital. 55 Some " pointed with pride " to the extension 
of the service into the rural districts. Almost the 
only defence of the rates which they devised, how- 
ever, was comprised in statements to the effect that 
" the 'phones of the province did not cost as much 
per 'phone as the 'phones in the provinces to the 
west " 56 (where there is also public ownership) and 
that telephone rates in New York City were higher 
than those in Winnipeg 57 — this latter statement 
being meaningless in view of the fact that the Gov- 
ernment had learned, to their sorrow, that unit costs 
increase with the number of telephones in an ex- 
change. Of course, in such a maze of charge and 
counter-charge, it is quite impossible to determine 
where the exact truth lies. It is inconceivable that 
the Opposition did not magnify their charges of 
political manipulation, of inefficiency, and of graft; 
but that there existed considerable foundation for 
such charges cannot be denied. As to rates, the 
Government themselves admitted their failure to re- 
deem their promises. 

There is, however, one defence of the Provincial 

54 Cf. the Manitoba Free Press, Winnipeg, July 8, 1914. 

55 Cf. The Evening Telegram, Winnipeg, July 8, 19 14. 

56 The Evening Telegram, Winnipeg, July 7, 19 14. 

57 Cf. the Free Press News Bulletin, Winnipeg, July 8, 1914. 



146 GOVERNMENT TELEPHONES 

telephone system which the then Government party 
always pleaded in extenuation of all their sins. This 
defence is the Government's record in extending the 
system, for whereas the system comprised only some 
14,000 telephones at the time of its acquisition from 
the Bell Company in January 1908, at the end of 
19 14 it included some 46,000 telephones. 58 Dur- 
ing a period of seven years the Government had 
added 32,000 telephones and had more than tripled 
the size of the system. Although the fact that po- 
litical rather than social motives impelled this ex- 
tension detracts a certain amount of glory from the 
achievement, nevertheless it is quite true that the de- 
velopment secured by the Government is highly cred- 
itable. But the allegations and insinuations of the 
adherents of the Government to the effect that this 
extension would never have been secured under any 
regime of unrestricted private enterprise are utterly 
unjustifiable, for there is not a scrap of evidence to 
warrant any conclusion that private initiative would 
not have developed the service to a similar extent. 
In the first place, as has already been pointed out, it 
must be remembered that the Bell Company had 
borne all the burdens and assumed all the risks of 
the pioneer, that it had gone into Manitoba at a time 
when there were only some 60,000 people in the en- 
tire Province, when the population of Winnipeg was 

^Seventh Annual Report of the Manitoba Government Tele- 
phones for the fiscal year ending November 30th, IQI4, p. 8. 



REORGANIZED 147 

only 8,000 and when Brandon and Portage la Prairie 
were mere villages. 59 The service which the com- 
pany initiated at that time it nurtured through all the 
successive periods of hardship and depression until 
a substantial business had been developed. The 
Manitoba Government, therefore, merely took over 
an established business and took it over in a period 
of expansion and prosperity which the Bell Company 
had anticipated and prepared for. 60 Consequently, 
it is apparent that as regards physical extension, no 
proper comparison can be made between the record 
of the Bell Company and the record of the Govern- 
ment. The only possible comparison which can be 
made is between the record of the Government in 
Manitoba and the record of private enterprise in 
similar communities in the United States, that is, in 
communities with large farming populations. 61 A 
glance at the telephone history of the United States, 
as shown by the statistics published by the Bureau of 
the Census at Washington, suffices to show that the 
progress made by the Manitoba Government is by no 
means unusual under private management, while as 
regards the present development of the service, the 
development in Manitoba is considerably exceeded 
by that in the States of the Union which are most 

59 Cf. p. 13, supra. 

60 Cf. pp. 26-28, supra. 

61 Comparisons with the Provinces of Alberta and Saskatchewan, 
the only similar Canadian communities, are unfortunately impossi- 
ble, as public ownership of telephones obtains in both of these 
Provinces as well as in Manitoba. 



148 GOVERNMENT TELEPHONES 

analogous to the Canadian Northwest. According 
to statistics prepared by the Government, at the end 
of 19 14 the total number of telephones in the Prov- 
ince of Manitoba was equivalent to an average of 95 
telephones per 1,000 population; 62 according to the 
statistics of the United States Bureau of the Census 
the number of telephones in Illinois and in Iowa, the 
greatest farming States of the Union, were respec- 
tively equivalent to 139 and to 171 telephones per 
1,000 population, while in Kansas, the great wheat 
State, and in Minnesota, the great barley State, the 
corresponding averages were 141 and 127 telephones 
per 1,000 population. 63 In other w T ords, in com- 
munities which are very similar in their economic and 
social aspects, the development of the telephone serv- 
ice is from 34 per cent, to 80 per cent, greater under 
private ownership than under public ownership. 64 
Such official statistics effectually dispose of any con- 
tention that unrestricted private enterprise could not, 
and would not, have secured in Manitoba as great a 
degree of telephone development as has been secured 
under Government control. 

The general election of 19 14 again returned the 

62 The Manitoba Free Press, Winnipeg, February 20, 1915. 

63 Telephones and Telegraphs and Municipal Electric Fire-Alarm 
and Police-Patrol Signaling Systems. Department of Commerce. 
Bureau of the Census. Washington 1915. Pages 15-16. 

64 Incidentally, the U. S. Census telephone statistics, which are the 
latest available figures, are for the year 1912, whereas the telephone 
development throughout the United States considerably increased 
during 1913 and 1914. The above percentages, therefore, are 
really too favorable to the Manitoba system. 



REORGANIZED 149 

Government to office. But only a narrow margin 
separated the victors from the vanquished and it was 
abundantly clear that the Government were rapidly 
losing prestige even in the rural districts. The mis- 
deeds of the Government and the failure of their 
ventures in public ownership had been proved costly 
and were destined to prove fatal, for so strong grew 
the Opposition that in the spring of the year 19 15 
the Government was forced to appoint a Royal 
Commission to investigate the charges against the 
administration. The Oppositon had prepared their 
case well and the evidence before the Commission 
soon revealed not only incompetence and inefficiency, 
but led to the prosecution of the Cabinet Ministers 
in the criminal courts for fraud. Before long the 
accumulation of testimony and proof was such as to 
shake the nerve of even the most hardened politician. 
The Premier and his colleagues decided to resign 
and, in May 19 15, they surrendered the Government 
to their political opponents without an election. 65 

This change of political masters .marks the end of 
what may be termed the second phase of the history 
of the Manitoba Government telephone system. 
During the three years comprised in the period, there 
is less spectacular evidence of the political influence 
with which the system was inevitably surrounded. 
The Government realized that the whitewash ap- 

65 In order to assure themselves of popular support, the new 
Government subsequently (in August) held a special general elec- 
tion, at which they were continued in office. 



150 GOVERNMENT TELEPHONES 

plied by the Royal Commission would serve to de- 
ceive only the more credulous among the voters. 
For publicity purposes, therefore, the Government 
went through the motions of a " reform." As a 
reluctant but necessary concession to public opinion, 
they relegated a certain amount of regulatory power, 
largely innocuous, to the Public Utilities Commis- 
sioner. The chief feature of the period, however, 
was that the Government, having interpreted the 
political handwriting on the wall, became even more 
elaborate in their pretenses and even more subtle in 
their manipulations, though they openly maintained 
their arbitrary attitude toward the consumer. The 
violation of their pledges continued. The promises 
as to rates were repudiated and the " exorbitant " 
rates of the former Bell Company were exceeded; 
political control continued to preclude the possibility 
of commercial management; and the ownership and 
operation of the system continued to be a burden on 
the finances and credit of the Province. 

SYSTEM USED FOR POLITICAL PURPOSES BY THE 

NEW GOVERNMENT; AN AGGREGATE LOSS 

OF $1,000,000 

At the time of writing the new Government have 
not been in power long enough to permit a critical 
review of their policies and performances to be un- 
dertaken; and the public mind has been so intent 
upon the world conflict that printed information as 



REORGANIZED 151 

to the telephone system is relatively meagre. Short 
as has been the tenure of office of the present Gov- 
ernment, however, certain of their acts and certain 
of the immediate results of their administration are 
nevertheless significant as unmistakable auguries of 
their future relations with the telephone system. 

In the first place it will be recalled that the politi- 
cal partisans of the new Government had always 
contended that the price paid for the Bell plant had 
been excessive. 66 Immediately upon assuming the 
reins of power in May, 19 15, the Government 
sought to substantiate this claim; and for this purpose 
the Attorney-General in the Provincial Cabinet " re- 
quested a statement showing the plant valuation of 
the Manitoba Government Telephones." 67 In pur- 
suance of this " request," officials of the telephone 
system made a valuation of the plant and submitted 
a report of their findings under date of June 23rd. 
" Complying with instructions," says this report, " we 
have compiled unit costs of all plant additions made 
during the period from January 1st, 1908, to No- 
vember 30th, 19 14, and, by applying these unit costs 
to the plant as purchased, 68 find the construction costs 
of total plant to be $1,138,568 less than stated in the 
last annual report. 69 Of this amount $802,336 per- 

66 Cf. pp. 29 and 94-95, supra. 

67 The Tribune, Winnipeg, July 5, 1915. 

68 " The plant as purchased " evidently means the total plant at 
November 30, 1914. 

69 Viz., Seventh Annual Report of the Manitoba Government Tel- 
ephones for the fiscal year ending November 30th, 1914. 



1 52 GOVERNMENT TELEPHONES 

tains to the original purchase, 70 and the remainder 
consists of amounts charged to construction, but 
properly chargeable to maintenance, during the three 
years following the purchase." 71 

That this hasty and unscientific valuation — a val- 
uation on the basis neither of original cost nor of 
cost of reproduction new — was undertaken largely 
for political purposes, is clear; for if the object of 
the valuation had been merely to measure the excess 
of the book value of the plant over its original cost 
(or over its cost of reproduction new) at the time 
when the present Government had assumed control 
of the system, it would have been unnecessary to de- 
vote either the time or the money to estimating the 
construction cost of the portion of the plan acquired 
from the Bell Company seven years before. 12 The 
portent of this appraisal is ominous: efficiency and 
economy will apparently always be subordinated to 
political advantage. 

As the valuation was unscientifically based upon 
the " unit costs of all plant additions made during the 
period from January ist, 1908, to November 30th, 
1914," it is clear that the figure of $1,138,568 in 
the appraisal report cannot be an accurate measure- 

70 I. e. the purchase of the Bell plant. 

71 This appraisal report was subsequently printed in Eighth An- 
nual Report of the Manitoba Government Telephones for the fiscal 
year ended November 30th, 1915, pp. 4-5. 

72 An estimate of the construction cost of the Bell plant was of 
course necessary to determine the portion of the excess of book value 
pertaining to the purchase of the Bell plant. 



REORGANIZED 153 

ment of the excess of the book value of the plant over 
its actual cost of construction; but in view of the 
partisan spirit in which the unit costs were without 
doubt — though possibly unconsciously — compiled 
and applied, it seems certain that the effect of errors 
operating to increase the excess of book value must 
have been greater than the effect of errors operating 
to reduce this excess. The result, then, is that the 
figure of $1,138,568 in the appraisal report is prob- 
ably somewhat too large. Nevertheless, for the 
purpose of the revisions of the accounts of the sys- 
tem in these pages the appraisal figure has been ac- 
cepted at its face value, and in recasting the accounts 
the amount of the excess of book value pertaining to 
the purchase of the Bell plant,— an amount which 
represents the price paid for the intangible items in- 
volved in the purchase, 73 — has been excluded in toto 
from the cost of the plant as shown by the annual 
accounts; and the total amounts ($336,232) repre- 
senting the maintenance expenses improperly charged 
to construction (or capital) during the first three 
years of Government operation has also been ex- 
cluded from the cost of the plant as shown by the 
annual accounts, the amount so charged to capital in 
each of the years having been carefully estimated. 74 
The result is that the moderation and the conserva- 
tism of the results of the recast accounts have been 
enhanced: the plant cost (after the deduction of the 
73 Cf. pp. 29-31, supra. 74 Cf . pp. 54-55, supra. 



154 GOVERNMENT TELEPHONES 

excess of the book value over the cost of construc- 
tion) being too small, consequently the annual de- 
preciation charges based upon the plant cost are too 
small, the total current expenses are too small, and 
the annual deficits are too small. 

Now, in recasting the accounts, the maintenance 
expenses improperly charged to capital in the first 
three years, after being deducted from the book 
cost of the plant, have been properly added to the 
current expenses for " Maintenance " in those years; 
but no charge has been included in the current ex- 
penses of any year to provide for the gradual ex- 
tinction of the amount of $802,336 paid for intangi- 
ble assets. There can be no question, however, that 
this intangible capital should eventually be written 
off and that, for this purpose, a charge should prop- 
erly have been included each year in current expenses ; 
indeed, the necessity for making such annual pro- 
visions for extinguishing intangible capital is recog- 
nized in the appraisal report, which states: "I 
would recommend that the excess in plant values be 
carried as intangible capital, and charged off in an- 
nual installments." 75 If, upon the acquisition of the 
Bell Company's plant, the Government had decided 
to write off this intangible capital in equal annual in- 
stallments during a period of as long as fifteen years, 
the amount properly chargeable to each year would 

75 Eighth Annual Report of the Manitoba Government Tele- 
phones for the fiscal year ended November 30th, IQI5, p. 5. 



REORGANIZED 155 

have been about $50,000, or an aggregate sum of 
$350,000 for the seven years of Government opera- 
tion ending November 30, 19 14. Since the ag- 
gregate losses of the system during the seven years, 
exclusive of these charges for amortization of in- 
tangible capital, reached the sum of $650,000, the 
total losses from Government operation up to the 
end of 19 14 aggregated at least a million dollars! 

INCREASING DEFICITS DESPITE REPORTS OF PROFITS; 

NO PROSPECT OF RELIEF FROM 

POLITICAL ABUSES 

The telephone accounts for the fiscal year ended 
November 30, 1915, 76 published in June, 1916, 
show a " surplus " of $22,541, of which $19,646 
was set aside as an additional reserve against de- 
preciation, leaving a credit " balance " for the year 
of only $2,895. Although the balance sheet shows 
that the Plant Account had been reduced during the 
year so as to represent the actual cost of construction 
of the plant as determined by the appraisal — the 
excess of the former book value of the plant over its 
cost of construction ($1,138,568) being carried as 
intangible capital, as recommended by the appraisal 
report — yet in determining the amount of the de- 
preciation charge included in the current expenses of 
the year no change was made in the calculation of the 

T6 Eighth Annual Report of the Manitoba Government Telephones 
for the fiscal year ended November 30th, 1915, pp. 3-4, 12-18. 



156 GOVERNMENT TELEPHONES 

average life of the plant. Therefore, since the same 
rates of depreciation were applied to reduced plant 
values, the result was that through a mere change in 
the form of the accounts, the depreciation charge 
became smaller instead of greater as it should have 
been. When an adequate depreciation charge is in- 
cluded in the current expenses, the result is as fol- 
lows: 

Gross Revenue ......... $1,769,589 

Expenses: 

Operation $602,366 

Maintenance 320,839 

Depreciation . ... 525,510* 

Total Expenses 1,448,715 - 

Net Earnings 320,874 

Interest 418,503 

Deficit $97>629 

* Equivalent to 6% of plant cost at the end of the preceding year. 

Therefore, the real result of the year's operations 
was a loss of about $100,000, exclusive of any charge 
for writing off intangible capital, — the largest an- 
nual loss since 19 12. Even allowing for the de- 
crease in business during the year, in view of the 
fact that the Telephone Commissioner said that " the 
policy of economy, as adopted for the year, was 
judiciously applied wherever possible " and spoke 
of the year's results as " gratifying," 77 the future of 

77 Eighth Annual Report of the Manitoba Government Telephones 
for the fiscal year ended November 30th, 1915, p. 3. 



REORGANIZED 157 

the telephone finances is indeed a matter of grave 
concern. 

When the system was placed under the supervision 
of the Public Utilities Commissioner in 19 12, 78 the 
Commissioner decided that a condensed statement 
of the earnings of the system should be issued each 
month. This practice, which has since been con- 
tinued, w r as beneficial in so far as the Public Utilities 
Commissioner could govern it; 79 but the accounts 
relating to interest upon the telephone capital did not 
fall within the Commissioner's jurisdiction. Con- 
sequently, these monthly statements of earnings have 
not shown, and do not show, interest charges; they 
show merely the excess of revenue over operating 
expenses, exclusive of interest charges — in other 
words, they show net earnings and not net profits. 
Now, these monthly statements have been widely 
circulated by the press; but in the press reports the 
net earnings in the statements have frequently been 
mistaken for net profits. For example, the report 
of the statement for September 19 15 in The Tribune 
of Winnipeg is headed " Month's Telephone Profits 
$42,441.23 " and begins: " Manitoba government 
telephones brought in a net profit of $42,411.23 in 

78 Cf. p. 118, supra. 

79 Subsequent to the change of Government in 1915, the Public 
Utilities Commissioner, "whose influence upon the system was salutary 
in so far as he had authority, resigned. In any consideration of the 
probable future relations of the Government with the telephone 
system, the apparent significance of his resignation should not be 
overlooked. 



i 5 8 GOVERNMENT TELEPHONES 

the month of September, according to a return issued 
to-day. The net profit for that month and the pre- 
ceding nine months was $330,330.46." 80 Such re- 
ports naturally induce utterly false conclusions. 

In the campaign preceding the bye-elections 
held in mid-summer, 1915, 81 the Government were 
naturally able to make effective use of their prede- 
cessors' record of continuous mismanagement. The 
appraisal report had also been completed in time to 
make an excellent basis for campaign arguments. 
But the Government and their political partisans 
went even further in their efforts to secure campaign 
material: the Government press called the appraisal 
" a preliminary investigation " and promised a " far 
more searching inquiry into the telephone enter- 
prise " if the Government were continued in office. 82 
In other words, promises in regard to the telephone 
system were once again used to attract votes; and the 
Government made no effort to conceal the fact that 
they were ready to use the system for political ad- 
vantage by instituting an expensive " searching in- 
quiry " which could serve no useful purpose. This 
attitude on the part of the present Government 
clearly indicates that a change of political masters 
has not meant a change of political methods. 

The utter futility of the Manitoba Government's 
invasion of the domain of commercial business is 

80 The Tribune, Winnipeg, October 30, 191 5. 

81 Cf. p. 149, note 65, supra. 

82 The Manitoba Free Press, Winnipeg, July 26, 1915. 



REORGANIZED 159 

shown by the unconcealed dissatisfaction which is 
rife at the present moment — dissatisfaction which, 
in spite of publicity work on the part of the Govern- 
ment, shows no evidence of subsiding. For exam- 
ple, the Manitoba Government Telephones is now 
denounced as " one of the most iron-clad monopolies 
imposed on any people "; 83 and complaint is made 
that the rates should be " cut in two " 84 — the iden- 
tical language employed eight and nine years ago dur- 
ing the political agitation against the Bell rates ! 

The people of the Province still have no prospect 
of ultimate relief from the abuses accompanying 
political control. 

83 The Winnipeg Telegram, December 6, 19 15. 
8 ±Ibid. 



IV 
CONCLUSIONS 

The net results of the foregoing narrative of the 
course of events and the critical examination of the 
accounts may be summarized as follows: 

i° The telephone system was taken over by the 
Government not in obedience to widespread public 
demand, nor on any administrative ground properly 
so called, nor because the existing service was in- 
adequate in scope or exorbitant in price, nor because 
sufficient capital was not forthcoming for extensions ; 
but solely because the Provincial Government thought 
they saw in its acquisition a party political advantage. 
In other words, the Government acquired the system 
not to promote the public interest in any real sense, 
but to promote the political interest of the Govern- 
ment party in such a way as to contribute to keep the 
Government in power. 

2° The promises made by the Government in 
order to stimulate a public interest which did not 
previously exist were made in some cases certainly 
without knowledge of the subject, in other cases 
probably without intention of fulfilment, in all cases 
without justification. 

160 



CONCLUSIONS 161 

3° From the beginning of public ownership, the 
telephone system was used for political purposes, 
sometimes overtly, at other times furtively, but al- 
ways with a cynical disregard for the interests of the 
public. 

4° The technical management of the system was 
always subordinated to the political management. 
Even rates were determined not by the Commission 
appointed by the Government, but by the Govern- 
ment itself; and in fixing these rates the Government 
discriminated sharply against the urban areas. This 
discriminatory policy was not unskilfully conceived. 
It was a policy of dividing to conquer; for by setting 
the interests of the classes who are in the majority 
against the interests of the citizens who are in the 
minority, the Government secured a political advan- 
tage. 

5° From the beginning the Government employed 
the balances of money in the hands of the Telephone 
Commission for its own general purposes. It also 
absorbed the funds which should have been held in 
trust for the replacement of worn-out plant. It neg- 
lected to provide an independent continuous audit 
and when, forced by local public opinion, it did call 
for an audit, it failed to adopt the important sugges- 
tions of its own auditor. 

6° The unsound financial policy and the misman- 
agement of the Government brought the telephone 
system to the pass that either the revenue had to be 



i6 2 GOVERNMENT TELEPHONES 

increased or the system had to be permitted to grav- 
itate rapidly into hopeless insolvency. In either 
case the disclosure had to be made that the acquisi- 
tion of the telephone system had not really been at- 
tended by the success that the Government had been 
constantly announcing. The straightforward thing 
for the Government to have done would have been 
to admit the faults of their administration, to vindi- 
cate the Commission, to provide out of the general 
revenues of the Province the whole amount of the 
estimated loss at that period, and at the same time to 
ask the Commissioners at what rates they were pre- 
pared to conduct the business. None of these things 
was done; instead, the Government proceeded to 
make the Commission a scape-goat, appointed a 
Royal Commission to inquire into the conduct of the 
Commissioners — that not being at all in question — 
and avoided scrupulously all reference to the Gov- 
ernmental blunders and misdeeds that had brought 
the telephone system into discredit. 

7° The Government secured the resignations of 
the Commissioners and proceeded to make hurried 
" reforms." These reforms were expensive; but as 
they were all made in a month it may be inferred that 
they were not very thorough. The new era of the 
telephone system was, however, ushered in by the 
appointment of an overseer in the person of the Com- 
missioner of Public Utilities. But even w T ith these 
changes, there is no evidence of any change of prac- 



CONCLUSIONS 163 

tice on the part of the Government. The fact is that 
the Government was not inclined to abandon the po- 
litical leverage given it by an industrial enterprise 
whose operations were so widely extended through- 
out the Province. 

8° Then came the evacuation by the Government 
of a position which had been rapidly becoming inse- 
cure. The members of the Government resigned 
and their places were taken (without an immediate 
election) by their opponents. 

9 A spectacular incident in Provincial politics 
occurred when the members of the Government 
which had just resigned, were prosecuted for con- 
spiracy, fraud, etc. 

io° Then came the resignation of the Public Util- 
ities Commissioner; and owing partly to the condi- 
tions induced by the war, but more largely to condi- 
tions in the previous history of the telephones, 
development of the system was arrested. 

ii° The entire history of the Government tele- 
phone enterprise in Manitoba affords evidence of the 
most positive character against Government owner- 
ship. Practically all of the defects which have 
emerged elsewhere in the management of industries 
by State officials have made their appearance in the 
case of the Manitoba Telephones. The manage- 
ment has been ineconomical, the enterprise has been 
handicapped by political intrigue, the finances min- 
gled as they have been with the general finances of 



i6 4 GOVERNMENT TELEPHONES 

the Province have been unsoundly administered from 
the beginning, and the obligations of the public have 
been enormously increased without adequate com- 
pensatory advantages. 

It is possible that only by repeated and costly 
failures such as the Manitoba Government Tele- 
phones, will the public realize that the proper func- 
tion of Government is not the conduct of industries 
but the impartial inspection of them under intelli- 
gent laws adapted to the character and conditions of 
the community and the country. 



THE END 



INDEX 



Accountancy practice of Gov- 
ernment Telephones con- 
demned by Chartered Ac- 
countants, 108 
unsound from beginning, 41, 
53, 58, 68 
See also Accounts 
Accounts of Government Tele- 
phones, as published, 

(1908) 51; (1909) 69; 

(1910) 78; (1911) 82; 

(1912) 124-125; (1913) 
127; (1914) 139; (1915) 
155 

as recast according to sound 
methods, (1908) 58; 

(1909) 69; (1910) 79; 

(1911) 83; (1912) 126; 

(1913) 129; (1914) 139; 
(1915) 156 

condemned by Chartered Ac- 
countants, 108 
criticized by Opposition, 52- 

53, 60 

fail to include interest 
charges, 69, 72, 78, 82, 
125 

fail to include provision 
against depreciation, 41, 
60, 69, 71-72, 78, 81, 82, 
86, 93-94, 107 

fail to provide any Sinking 
Fund, 71 

improperly include Mainte- 
nance expenses in capital, 

54, 55, 60, 68, 78, 152 ^ 
include inadequate deprecia- 
tion charge, 125, 127-128, 
139, 155-156 



165 



Accounts — continued 

include interest charges, 127, 

138 
include unearned revenue, 53, 

60 
Method of recasting, 54-57, 

153-154 
not properly audited, 74 
show Maintenance expenses as 

separate item, 125 
Administration of Government 

Telephones, Organization 

of, 36-38 
Reorganization of, 67 ', 116, 

. \ 37 
Admissions by Government of 

failure to fulfill promises, 

145 

Advisory Telephone Board ap- 
pointed, 118 

Alberta, Telephone system in, 
viii, 65, i47n. 

Appraisal of Government tele- 
phone plant (1915), 151 
basis for campaign argu- 
ments, 158 

Arbitrary telephone rates, 121 

Armstrong, Dr., M. P. P., 73 

Attorney-General of Manitoba, 
19, 21, 73 

Audit, Absence of, 74 

Change of system of, 137, 138 
ineffectual, 161 

Auditor, Telephone accounts not 
audited by Provincial, 74 

Australia, Telephones in, 91 

Barry, Mr. R. L., of Minneapo- 
lis, appointed Royal Com- 



1 66 



INDEX 



Barry, Mr. R. L. — continued 
missioner (1912), 97 
Interrogations of, 101 
appointed sole Telephone 

Commissioner, 115 
assumes duties, 116 
resigns, 116 
Bell Telephone Company, 13, 
14, 15, 16, 18, 19, 21, 22, 
23, 25n, 26, 27, 28, 29, 35, 
36, 42, 45, 45n, 48, 52, 59, 
59n, 76, 87, 93, 95, 113, 
129, 146, 147 
Birtle, Manitoba, 23 
Brandon, Manitoba, 13, 14, 22, 

106, 147 
Bulletin, The (Winnipeg), 68n. 

Canada Year Book 1914, 136 

Canadian Finance, 107 

Canadian Independent Tele- 
phone Association, 2in. 

Capital account of Government 
Telephones, inflated by 
improper addition of 
Maintenance expenses, 55, 
60, 68, 78 
expenditure of Bell Telephone 
Company, 26-27 

Census of Canada, igii, 13 

Chicago (111.), Telephones in, 

97 

Christie, Mr., Member of Com- 
mittee on Telephones, In- 
dustrial Bureau of Win- 
nipeg, 94 

Citizen, The (Ottawa), i7n. 

Climate. See Depreciation 

Coldwell, Mr., Member of 
Manitoba Government, 
113 

Commercial management of tele- 
phones promised by the 
Government, 33-35 

Commission, Royal. See Royal 
Commission 



Commission, Telephone, ap- 
pointed, 36 

Membership of, 36-37 

Original functions of, 36, 37 

lacks full power, 37, 38, 41, 
66, 69, 70-71, 72, 78, 104, 
107, 138 

subjected to political pressure, 
38-42, 43, 44, 46, 64, 74, 
84-86, 106, 107 

additional functions of, 46 

introduces functional organ- 
ization, 67 

forces Government to meet 
deficit or increase rates, 
81-82 

puts into effect reduced local 
rates (1909), 62-64 

increases long distance rates, 
88 

proposes to increase local 
rates (1911), 88-90 

Government expresses confi- 
dence in, 96 

investigated by Royal Com- 
mission of Inquiry, 96- 
iii 

made scapegoat for Govern- 
ment, 99 

loyal to Government during 
inquiry of Royal Commis- 
sion, 102 

made to appear responsible 
for practices over which 
it has no control, 103-109 

resigns, 112 

Mr. R. L. Barry appointed 
sole Commissioner, 115 
resigns, 116 

Mr. G. A. Watson appointed 
sole Commissioner, 117 

placed under supervision of 
Advisory Telephone 

Board, 118 

given more independent pow- 
er, 118 



INDEX 



167 



increases rates (1912), 121 
Committee on Private Bills 
(Manitoba Legislature), 
16 
Competition in telephone serv- 
ice prevented by Mani- 
toba Government, 122- 
123 
Construction of telephones, Con- 
trol over, by Government, 

37, 38, 39, ip9 
Feverish energy in, 43 
ineconomical and marked by 
political abuses, 38, 43, 
76-78, 81, 83-86, 105 
Not all, justifiable, 38, 75, 84 
retarded, 118, 143, 163 
to be let on contract under re- 
organized system, 123 
Cost, Promises by the Govern- 
ment to provide tele- 
phones at, 18, 50, 52 
per unit, Decrease of, un- 
der reorganized system 
(1912), 117 ^ 
Increase of, with increased 
number of telephones in 
use denounced by the 
Government as a " falla- 
cious theory,"' 19 
proved to increase with in- 
creased number of tele- 
phones in use, 145 
Credit of Province damaged by 
Government ownership 
of telephones, 32, 47, 70, 
H3, 150 
Criticism of Government under- 
takings by public not usu- 
ally instructed or ef- 
fective, 4 
Crowe, Mr. G. R., Royal Com- 
missioner (1912), 96 

Debt, Effects of increase in pub- 
lic, 6, 11 



Debt — continued 

of Manitoba doubled by the 
acquisition of Bell tele- 
phone system, 31 
See also Credit 
Defence by the Government of 

its telephone policy, 146 
Deficit of Government Tele- 
phones after accounts are 
recast on a sound basis, 
(1908) 58; (1909) 69; 
(1910) 79; (19") 83; 
(1912) 126; (1913) 129; 
(1914) 139; (1915) 156 

as published (1911), 82 

concealed by unsound ac- 
counting practice of the 
Government, 58 et passim 

pointed out by Opposition 
press, 52-53 

exceeds $300,000, 83 

at least $650,000, 141 

aggregates at least $1,000,000, 

155 
may be expected to continue, 
140, 156-157 
Depreciation not provided for, 
54, 71-72, 78, 81, 82, 86, 
93-94, 107 
rapid on account of climate 
of Manitoba, 55, 5511, 128, 
140 
charge, Absence of, criticized 
by the Industrial Bureau 
and the Board of Trade 
of Winnipeg, 94 

Absence of, noticed by Op- 
position, 60 

inadequate, 125, 127-128, 
139, 155-156 

included in current expenses 
for the first time, 124 

Method of calculation of, 
unscientific, 128 

ought in the case of Mani- 
toba to be at least 6 per 



i68 



INDEX 



Depreciation — continued 

cent, annually, 55, 141 
placed under supervision of 
Public Utilities Commis- 
sion, 118 
recommended by Telephone 
Commission and refused 
by Government, 41, 56, 
86 
reserve improperly applied, 
142 

Depression of trade in Mani- 
toba (1914), 136 

Deterioration of service, Al- 
leged, 93, 106, 131 

Detroit News Tribune, 48n. 

Development of telephone sys- 
tem retarded from vari- 
ous causes, 118, 143, 163 

Disadvantages of public owner- 
ship. See Public owner- 
ship 

Discrimination in service, 39, 

t 43-44, U 
Dominion Government refuses 
to amend charter of Bell 
Telephone Company, 16- 

17 
Parliament and the telephone 
question, 65 

Eastern Canada, 15m 

Election, General (1907), 25; 

(1914) 143, 148, 149; 

(1915) i49n, 158 
Employees appointed for po- 
litical reasons, 40, 44, 66- 
67, 104 

incompetent, 104-105 
used for political purposes, 
144 
See also Labor, Patronage, 
Wages 
Europe, Telephones in, 15 
Evening Telegram, The (Win- 
nipeg), 145m 



Farmers' telephones. See Ru- 
ral telephones 

Finance. See Accounts, Deficit, 
Depreciation, Overdrafts, 
Profits 

Finances of Manitoba, 25, 47, 
136, 143, 150 

Financial methods of the Gov- 
ernment in relation to the 
telephone system, 41, 70- 
72, 80, 86, 104, 142 
results of Government opera- 
tion of telephones. See 
Accounts 

Free Press News Bulletin 
(Winnipeg), 145m 

Friction between Telephone 
Commission and employ- 
ees, 67 ', 117. See also 
Employees, Labor 

Gazette, The (Montreal), 36 
Germany, Telephones in, 91 
Government ownership. See 

Public ownership 
Government of Manitoba con- 
fesses ignorance of the 
telephone business, 96 
Increase of control by, in 19 14, 

138 
Relations of, to Telephone 
Commission, 39, 97, 99, 
118 
See also Political pressure 
Governmental management of 
industrial enterprises in- 
economical, 6-7 
Grain elevators, Public, 119m 
Great Britain, Telephones in, 
91, 131-132 

Hayes, Mr. W. H., Commis- 
sioner Engineer (First 
Telephone Commission), 
37, 68 
Resignation of, 113 



INDEX 



169 



Head office expenses proposed 
to be saved under Gov- 
ernmental management 
of telephones, 33 
functions, 109 

neglected by Manitoba 

Government, 38 

Herald, The (Montreal), 17m 

Horan, Mr. H. J., Commissioner 

Auditor (First Telephone 

Commission), appointed, 

37 
Memorandum by, 44, 85, 86 
Resignation of, 112 

House of Commons (Canadian), 
Misleading statements as 
to the financial results of 
the Manitoba Govern- 
ment Telephones made in 
(1909), 65 

Hydro-electric system for Mani- 
toba proposed and re- 
jected, 32 

Illinois, Telephones in, 148 

Independent Telephone Com- 
pany of Canada, i6n. 

Inspection rather than operation 
the proper function of 
Government, 164 

Intangible capital, 29-31, 59, 95, 

153, 154 
ought to be written off by an- 
nual instalments, 59, 154 
Interest. See Accounts 
Iowa, Telephones in, 148 

Journals of the Legislative As- 
sembly of Manitoba, i6n, 
i7n, i9n, 5on, 6on, 74n, 
75n, ioin, n8n. 

Kansas, Telephones in, 148 

Labor difficulties in Manitoba 
Government telephone 



system, 66-67, 83-84, 104, 
130 

Scarcity of, 44, 77, 104 

La Crosse (Wis.), Telephones 
in, 97 

Legislation permitting munici- 
pal ownership and opera- 
tion of local telephone ex- 
changes (1899), 15 

Legislature of Manitoba, 16, 19, 
27, 29, 34 

Liberal Handbook (1914), 144 

Locke, Mr. Justice, Royal Com- 
missioner (1912), 96 

Long Distance service, 18, 20, 
25, 43, 87 

Loss in operation of Manitoba 
Government Telephones, 
See Deficit 

Maintenance expenses improp- 
erly charged to capital, 
54, 55, 60, 68, 78, 152 
shown as a separate item, 
125 

Manitoba Free Press (Winni- 
peg), i6n, i8n, 2on, 2in, 
23n, 24n, 25n, 26n, 27n, 
3m, 32n, 33n, 34n, 43n, 
45n, 46n, 4 7n, 4 8n, 49n, 
5on, 52n, 53, 53n, 6on, 
67n, 76, 77n, 85n, 88, 88n, 
97n, 105, io6n, io7n, 
U2n, n6n, I22n, I23n, 
I42n, i44n, i45n, i48n, 
158m 

Manitoba Government and Pub- 
lic Ownership of Tele- 
phones, The, 23 

Measured service rates intro- 
duced (1909), 63 
proposed to be made compul- 
sory for business lines in 
Winnipeg, 90 
plan dropped, 100 

Milwaukee Sentinel, The, 14m. 



170 



INDEX 



Milwaukee (Wis.), Telephones 
in, 141 

Minister of Public Works, 16, 
17, 50, 55n, 61 
Telephones and Telegraphs, 
32, 37, 45-46, 118. See 
also Telephones and Tel- 
egraphs, Department of 
Railways 

Minneapolis Journal, 48n. 

Minneapolis (Minn.), Tele- 
phones in, 97 

Minnesota, Telephones in, 148 

Morning Post, The (London), 
i32n. 

Municipal Act (Manitoba), 15 
agitation for public owner- 
ship of telephones in 
Manitoba, 15 
exchanges, Isolation of, 16 
ownership of telephones in 
Manitoba, 15, 19, 24, 25, 
45n. 



Neepawa, Manitoba, 15, 21 
New York Tribune, 48m 
Ninga, Manitoba, Dismissal of 
telephone agent at, on po- 
litical grounds, 6jn. 
North West Telephone Com- 
pany, 16 



Official Report of the Delates of 
the House of Commons 
(Canada), 65n, 66n. 
Opposition party in Manitoba 
Legislature, 20, 29, 50, 60, 
101, 143, 144, 149 
attacks the terms of tele- 
phone purchase, 29, 31 
criticizes telephone accounts, 

60, 74 
criticizes telephone admin- 
istration, 144 



Opposition party — continued 
moves for Committee on 
telephone system, 101 
press and Government tele- 
phones, 26, 31, 43, 47, 50, 

5f> 53, 92, 144 

criticizes telephone ac- 
counts, 52-53 

criticizes increase of rates, 
92 
Orders-in-Council (Manitoba), 

37, 4i, 46, 96 

Ottawa Free Press, The, 17 -n. 

Overdrafts from Bank by Tele- 
phone Commission, 60, 86, 
142 

Paris, Telephones in, 15 

Paterson, Mr. F. C, first Chair- 
man of Telephone Com- 
mission, 36, 55n, 70, 72, 

85, 9h 107, no, 113 

Patronage in telephone admin- 
istration, Political, 44, 46, 
84-85, 104 

Piper, Mr., member of Com- 
mittee of Industrial Bu- 
reau of Winnipeg, 94 

Poles for telephones, Excessive 
numbers of, purchased by 
the Government, 39-40, 
103 

Political origin of agitation for 
Government ownership 
of telephones, 16, 18, 22, 
25, 34, 35, 160 
pressure exercised on tele- 
phone management, 38- 
42, 43, 44, 46, 50, 64, 66, 
67, 74, 7^ 84-86, 103, 106, 
107, 118, 138, 144 
Apparent decline of, 149 
Apparent revival of, un- 
der new Government, 
152, 158 
promised to be avoided, 34 



INDEX 



171 



Political origin — continued 

upon Telephone Commis- 
sion other than Govern- 
mental, 85 
situation in Manitoba in 1906, 
20 
Portage la Prairie, Manitoba, 

13, i4> 147 

Postmaster General of United 
States on cost of rural 
mail delivery, 123m 

Private enterprise and the tele- 
phone, Manitoba, 13-29, 
122-123 
United States, 148 

Profits, Fictitious, 10, 41, 48, 49, 
51, 61, 65, 69, 70, 78, 80, 
125, 127, 139 
under new Government, 
155, 157-158 
promised under Government 
ownership, 19-20, 32-33, 

35 
See also Deficit 
Promises. See Commercial 

management, Profits, 

Rates 
Public Accounts of Manitoba, 
25n, 50, 69n. 
Committee (Manitoba Leg- 
islature), 60, 64, 70, 72n, 
73n, 74, 86n. 
Exploitation of the Govern- 
ment telephone system by 
the, 45 
interests wholly overlooked in 
Government administra- 
tion of telephones, 161 
ownership, Future of, as af- 
fected by the war, 11 
not suitable or necessary 
for telephone business, 2- 

4 m 
Origin of, in Manitoba, 

summarized, 34-35 
Pecuniary disadvantages of, 

5-6 



Public Accounts — continued 

Results of, in foreign coun- 
tries, 1-9 
Social disadvantages of, 2- 

. A' 8 " 9 
Utilities Commission, 118, 

124, I28n, 130, 157, i57n. 
approves rate increase 

(1912), 121 
Beneficial influence of, 119, 
127 
Purchase of the Bell telephone 
system by the Govern- 
ment, 26, 28, 29, 95, 151, 

154 

price of Bell telephone sys- 
tem, 28 
criticized by Opposition and 
defended by Government, 
29-31, 94-95 
not unreasonable, 31 

of telephone supplies con- 
trolled by the Govern- 
ment, 37, 40 

Rates promised to be "cut in 
two," 19, 21, 22, 35 
reduced considerably, 17, 19, 

23, 32 
reduced to "cost," 18, 20, 
5o, 52 
Retention of Bell Telephone 

Company's, 47 
Sectional increase of (1908), 

42, 47 
Reduction of, by Government 
for political purposes 
(1909), 62-64, 73 
Unjustifiability of, 66 t 81, 86 
Increase of long distance, 88 
Proposed increase of (1911), 
88-90 
technically justifiable, 91 
Violent opposition to, 92-93 
abandoned (1912), 100 
Reports upon, by Winnipeg 



172 



INDEX 



Rates promised — continued 

Board of Trade and In- 
dustrial Bureau, 93-94 
placed under supervision of 
Public Utilities Commis- 
sion, 118 
General increase of (1912), 
i2i, i44> 145, 150 
increases revenue by $200,- 

000 per year, 129 
produces insufficient reve- 
nue, 140 
complained of by public, 

159 

of Bell Telephone System in 
the United States, 129 

Private company offers to re- 
duce, 122 

General schedules of, 62-63, 
89, 121 
Rebates demanded on the 
ground of announcement 
of fictitious profits, 50 
Reconstruction costs improperly 
charged against current 
revenue, 56, 104 

properly charged against De- 
preciation Reserve, 125 

Telephone Commissioner an- 
ticipates great increase 
of, 140 
Reorganization of Government 
Telephones, (1909) 67; 
(1912) 116 

Plan for (1915), 137 
Report by independent account- 
ants on Government 
bookkeeping system, 108 

of American Telephone and 
Telegraph Company 

(1913), 129m 

of Citizens' Committee of In- 
quiry as to Local Tele- 
phone Rates (Winnipeg 
Industrial Bureau), 94 

of Manitoba Government 



Report — continued 

Telephones, 53, 55n, 68, 
75n, 78n, iosn, ii5n, 
n6n, ii7n, i24n, i25n, 
I27n, i28n, i3on, I37n, 
i4on, i42n, i46n, 15m, 
I52n, i54n, 15511, is6n. 

of Public Utilities Commis- 
sioner of Manitoba, 12m, 
i3on, 13511, 137, i38n. 

of Royal Commission of In- 
quiry into Telephone 
Commission (1912), 97, 
100, 112 

of Telephone Committee 
(Winnipeg Board of 
Trade), 94 
Resignation of Manitoba Gov- 
ernment (1915), 149 

of Public Utilities Commis- 
sioner (Mr. Robson), 
157m 

of Telephone Commission, 
112 
Resolutions and Memorials of 
the Legislative Assembly 
of Manitoba respecting 
Public Telephones (1906), 
2on. 
Roblin, Sir Rodmond (Premier 
of Manitoba), 16, 17, 21, 
27, 29n, 33, 96n. 

Resignation of, 149 
Robson, Mr. H. A., K. C. (Pub- 
lic Utilities Comissioner), 
118, 157 

Beneficial influence of, 119, 

Resignation of, i57n. 
Rome, Telephones in, 15 
Royal Commission of Inquiry 
into Telephone Affairs 
appointed, 96 
Scope of inquiry of, 99 
Stenographic report of, 39, 
97 



INDEX 



173 



Royal Commission — continued 
Public indifference to, 98 
Interim report of, 100 
Evidence before, 101 
Influence of Government 

upon, 101, 102 
makes no reference to De- 
preciation Reserve or 
Sinking Fund, 107 
Final report of, 97-98 
Unsatisfactory character of 

final report of, 111 
attempts to vindicate the 
Government at the ex- 
pense of the Telephone 
Commission, in 
to investigate charges against 
the Manitoba Govern- 
ment^ (1915), 149 
Rural municipalities, 15 

rates, Reduction of, by Gov- 
ernment for political pur- 
poses, 62-64, 73 
Proposed increase of 

(1911), 88-90 
Increase of (1912), 121 
telephones, Cost of installa- 
tion of, 85 
Extension of, 38, 43, 81, 84, 

106, 147 
promised on behalf of the 
Government at $1 per 
month, 23 

Salaries. See Wages 

Saskatchewan, Telephones in, 
viii, 65, 147m 

Schedule of rates, (1909) 62- 
63; (1911) 89; (1912) 
121 

Service, Quality of, Alleged de- 
terioration of, 93, 106, 
131 
under Bell Telephone Com- 
pany, 18 
under Government admin- 



Service — continued 

istration, 47-48, 93, 106, 

131, 133-135, 144 

Sessional Papers of Manitoba 
Legislature, 25n, 29n, 37n, 
5m, 56n, 64n, 68n, 69n, 
72n, 73n, 75n, 7 9 n, 8 3 n, 
86n, 97n, ioon, io5n, 
n6n, i26n, 142m 

Sinking Fund, No provision for, 
71, 107 

Sise, Mr. C. F. (President of 
the Bell Telephone Com- 
pany of Canada), invited 
to discuss terms of pur- 
chase, 28 

State action, Habit of leaning 
upon, 98 
collectivism, Oscillations in 
attitude of public to- 
wards, 2 
usually adverse to technical 
progress, 2 
monopoly, Effects of, z 

Statutes of Manitoba, i5n, 2on, 
24n, 25n, n8n. 

St. Paul (Minn), Telephones in, 

. 97 
Strike threatened by Winnipeg 

telephone employees, 67 
Subscribers, Number of. See 

Telephones, Number of 
Surplus. See Profits 

Taxation, Government Tele- 
phones free from, 59n, 
142 
involves reduced yield 
from, 142 
of Bell Telephone Company, 
59n. 
Telephone Commission. See 
Commission, Telephone 
Commissioners. See Commis- 
sion, Telephone 
Telephones and Telegraphs, 



174 



INDEX 



Telephones — continued 

Department of Railways, 
29, 30, 32,^ 36, 45-46 
See also Minister of Tele- 
phones and Telegraphs 

Number of, 13, 14, 27, 28, 75, 
141, 146 

Growth in, not due to Gov- 
ernment control, 76, 146- 
148 
Telephone system in Manitoba, 
Beginning of (1880) , 13 

Purchase of, by Bell Tele- 
phone Company of Can- 
ada (1881), 13 

Extension of (1882-84), 13 

Economic depression causes 
slow development of 
(1888-1905), 14 

Character of immigration re- 
tards development of, 14 

Rapid expansion of (1900- 
1908), 15 

Inquiry by Government into, 
16 

Application of Manitoba to 
Dominion Government to 
amend charter of Bell 
Company rejected, 16-17 

Project of joint Governmental 
and Municipal owner- 
ship, 17 

Policy of Government regard- 
ing, 18, 20 

Committee of Legislature on 
(1906), 19 

Alleged exorbitant rates of, 

19 

Rates to be "cut in two" by 
Government, 19, 21, 22 

Construction of competitive 
Government system in 
Winnipeg (1907), 23 

Municipalities reject Govern- 
ment policy in respect to, 
24 



Telephone system — continued 

Purchase by the Government 
of the Bell, 26 

Position at the time of pur- 
chase of the, 27 

Terms of purchase of, 29-31 

Promises of Government re- 
garding,^, 33, 35 

First Commission appointed 
to manage, 36 

Commission for management 
lacks full power, 37 

Political pressure upon, 38 et 
seq. 

Abolition of technical staff in 
Telephone Department, 

Opposition criticism of, 47 

Alleged surplus from, 48 

Political importance of, 49 

Accounts of (1908), 51 

Real deficit in, 53 

Current expenses of, improp- 
erly charged to capital, 54 

Necessity of recasting ac- 
counts of, 54 

Absence of Depreciation Re- 
serve in, 55 

Deficit (1908), 58 

Opposition criticism of ac- 
counts of, 60 

Reduction of rates in, 62 

Unremunerative farmers' rate 
in, 64 

Influence of misstatement of 
financial results in, 65 

Labor difficulties of, 66 

Reorganization of, 67 

Deficit in (1909), 69 

Public Accounts Committee, 
criticism of, 70 

Political abuses in, 76 

Deficit in (1910), 79 

Crisis of (1911), 81 

Disappearance of fictitious 
" surpluses," and admis- 



INDEX 



175 



Telephone system — continued 

sion of heavy loss upon, 
81 

Deficit in (1911), 83 

Specific causes of financial 
failure of the, 83 et seq. 

Political influence in, 85 

Long distance rates increased 
in, 88 

New local rate schedule pro- 
posed for, 89, 90 

Measured service proposed 
for, 90, 91 

Hostility to rates proposed for, 
92 

Royal Commission of Inquiry 
upon, 96 

Public indifference towards 
Commission upon, 99 

Employees of, incompetent 
and appointed for polit- 
ical purposes, 104, 105 

Alleged deterioration of serv- 
ice in, 106 

Resignation of Commission 
for management of, 112 

Appointment of sole Commis- 
sioner for, 115 

Resignation of Commissioner 
for, 116 

Appointment of new Commis- 
sioner for, 117 

Public Utilities Commissioner 
to supervise, 118 

Rates increased in, 121 

Deficit in (1912), 126 

Deficit in (1913), 129 

Unsatisfactory service, 131 et 
seq. 

Auditor's certificate absent 
from accounts of (1914), 
138 

Deficit in (1914), 139 

Anticipated increase of re- 
construction charges in, 
140 



Telephone system — continued 
Misuse of trust funds of, 142 
Credit of Province damaged 

by, 143 
Influence of change of Gov- 
ernment upon (1915), 149 
Appraisal of plant of, 151 
Political influence still exer- 
cised upon, 152 
Aggregate loss upon, 155 
Deficit in (1915), 156 
Misleading statement of finan- 
cial results of, 157 
Conclusions regarding, 160 et 
seq. 
Telephony, 49n. 
Toronto, Ontario, Telephones 

in, 141 
Toronto World, The, 14m. 
Trades and Labor Council of 

Winnipeg, 67 
Treasurer of Manitoba, 51 
Tribune, The (Winnipeg), 49n, 

96n, 15m, i57n, i58n. 
Trust funds improperly applied, 
142 

United States, Telephones in, 19, 
91, 129, 147, 148 

Valuation of Bell system in 
Manitoba by Government 
engineer, 29, 30 
Government plant (1915), 

151 

basis for campaign argu- 
ments, 158 

Vienna, Telephones in, 15 

Wages, Decrease of, 117, 130 
Increase of, 130 
Dissatisfaction of employees 
with, 131 



176 



INDEX 



War, Advantage of private 
ownership of telephones 
as preparation for, 3-4 

Watson, Mr. G. A., Commis- 
sioner of Telephones, 117 

Webb, Read, Hegan, Callaghan 
and Company, Chartered 
Accountants, Report of, 
108 

Winnipeg, 13, 14, 22, 25, 26, 42, 

89, 90, 91, 92, 93, 97, 98, 
IOO, III, 121, 131, 146 



Winnipeg — continued 

Board of Trade of, Report on 

rates, 93, 94, 122 
Industrial Bureau of, Report 
on rates, 93, 94, 122 

Winnipeg Telegram, The, i3n, 
I4n, i5n, i6n, 2in, 27n, 
3on, 34n, 45n, son, 52n, 
53n, 62n, 89n, 12m, i23n, 
I59n 

Woodbridge, Manitoba, 77 



